Setting Up An Investment Fund: Hong Kong Guide

Hong Kong is a leading Asian centre for fund management and a popular destination for investors. The city's favourable tax environment, talented workforce, and advanced infrastructure make it an attractive location for setting up an investment fund.

The Hong Kong government has implemented several initiatives to promote investment and strengthen its position as a financial hub. These include the establishment of the Hong Kong Investment Corporation (HKIC) and the Hong Kong Growth Portfolio (HKGP), which aim to attract enterprises and support their business development in Hong Kong.

When setting up an investment fund in Hong Kong, investors should be aware of the regulatory framework and licensing requirements. The Securities and Futures Commission (SFC) is the primary regulatory body overseeing investment activities. The type of fund structure, such as a unit trust or a corporate fund, will determine the specific regulations and authorisations needed.

Additionally, the fund manager plays a crucial role in the success of the investment fund. They must comply with the SFC's fit and proper criteria and demonstrate competence in the financial field by obtaining relevant licenses.

Overall, Hong Kong offers a favourable environment for establishing investment funds, and investors can benefit from the city's vibrant business landscape and supportive government initiatives.

Understanding the regulatory framework for funds in Hong Kong

Hong Kong is an international asset management and fund distribution hub, with over 2,000 retail investment funds authorised by the Securities and Futures Commission (SFC). The SFC is the main institution that supervises the activity carried out through investment vehicles and enforces investigatory, supervisory and intervention powers.

There are two principal types of fund structures offered in Hong Kong: unit trusts and corporate funds. Funds can be established in Hong Kong either in corporate form as open-ended fund companies (OFCs), Limited Partnership Funds (LPFs), or in the form of a unit trust.

The regulatory regime governing OFCs comprises:

• Part IVA of the Securities and Futures Ordinance (SFO) which sets out the legal framework for establishing an open-ended fund company
• The Securities and Futures (Open-ended Fund Companies) Rules (OFC Rules) and the Code on Open-ended Fund Companies (OFC Code) which contain the detailed legal and regulatory requirements for OFCs
• The Securities and Futures (Open-ended Fund Companies) (Fees) Regulation (Fees Regulation) which provides for the fees chargeable by the SFC and the Companies Registry in respect of OFCs

The OFC Regulatory Regime provides for OFCs which are to be publicly offered in Hong Kong (public OFCs) and more relaxed provisions for non-public OFCs (private OFCs). Public OFCs must be authorised by the SFC, which requires that they meet the requirements of the Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (SFC Products Handbook, including the UT Code).

The regulatory framework applicable to private hedge funds stipulates that such entities are not required to obtain authorisation from the SFC. Instead, the procedure dictates that the fund will operate through the regulations available for fund managers. A fund manager carrying out investment activities in Hong Kong will receive authorisation from the SFC, following Part V of the SFO.

The regulations on how to start a fund in Hong Kong registered as a retail structure require investors to obtain authorisation for the fund, issued by the SFC. The license is regulated under the SFO. This type of fund also needs to follow the regulations prescribed by the Code of Unit Trusts and Mutual Funds (Chapter 8.7).

Approval from the SFC is needed before engaging in fund activities and investors who want to open a hedge fund need to obtain specific licenses. Fund management firms will also have to obtain licenses for their sub-managers or other individual representatives.

Selecting the right legal entity for your fund

When setting up an investment fund in Hong Kong, you have to select a legal entity under which the fund will function. As a general rule, such funds can be incorporated in this country as companies or partnerships (more precisely, limited partnerships). If you are interested in creating a hedge fund with multiple compartments, the most suitable option would be a segregated portfolio company, another popular way to register a hedge fund. Through a segregated portfolio company, the fund will be able to carry out multiple investment strategies at the same time, and each sub-fund will benefit from a separate pool of assets. It is necessary to know that through this structure, the investors of the fund will be able to appoint a fund manager for each of the sub-funds, or they may use the services of the same manager, regardless of how many compartments the fund has.

A hedge fund in Hong Kong can also be set up as a limited partnership and it can be managed by an investment manager (individual or company). Common types of hedge funds include the simple fund and the mutual fund.

An offshore hedge fund in Hong Kong can use a mutual fund company or a limited partnership set up in the Cayman Islands, which uses a two-tier management structure. In this case, the investment company is a Hong Kong company that holds a suitable license from the Financial Services Commission.

Complying with the Securities and Futures Commission's requirements

To comply with the Securities and Futures Commission (SFC) requirements, investors must first obtain approval from the SFC before engaging in fund activities. The SFC is the main institution that supervises the activity carried out through investment vehicles in Hong Kong. The SFC requires that funds be authorised on a case-by-case basis.

The SFC stipulates that the fund management company must be a licensed corporation, and it can be a Hong Kong-registered company. The fund manager cannot operate as a sole trader or a partnership. The manager must pass the competence requirements set forth by the SFC, as well as the "fit and proper test", which includes proving a sound business structure, adequate internal control, and qualified personnel.

The fund management company will need to appoint two responsible officers/representatives who will need to obtain approval from the SFC. In some cases, the SFC authorisation for the fund may not be requested, but this only applies if the fund is marketed to professional investors.

The SFC regulates the capital requirements for hedge funds. A company that has received a license to manage a fund will need to meet the requirements for liquid capital computation as of the end of the reporting month. The floor requirement set forth by the SFC can be HK$100,000 or HK$500,000, as well as HK$3,000,000 or HK$15,000,000, depending on the activities the licensed company engages in.

A corporation licensed in Hong Kong by the SFC under the Securities and Futures Ordinance will need to submit a monthly or semi-annual financial return, which includes a special form for the computation of the company's liquid capital.

The SFC has investigatory, supervisory, and intervention powers, which it can exercise in cases of non-compliance. The SFC can also exercise disciplinary powers against the investment manager of an OFC for misconduct that is prejudicial to the interest of the investing public.

The SFC has adopted a one-stop process for establishing an OFC. Applicants need only submit an application to the SFC, which will then liaise with the Companies Registry.

Meeting capital and taxation requirements

The Hong Kong Investment Corporation Limited (HKIC) is a government-owned entity that manages the investment activities of several funds, including the "Hong Kong Growth Portfolio," "Greater Bay Area Investment Fund," "Strategic Tech Fund," and "Co-Investment Fund." The HKIC aims to enhance Hong Kong's economic vitality and competitiveness by identifying investment opportunities and promoting the development of target industries.

To establish an investment fund in Hong Kong, meeting capital and taxation requirements is essential. Firstly, it is necessary to understand the specific capital requirements for setting up an investment fund in Hong Kong. The Hong Kong Monetary Authority (HKMA) outlines the regulatory framework for investment funds, ensuring compliance with the Securities and Futures Ordinance and the Codes on Unit Trusts and Mutual Funds. Familiarizing yourself with these regulations is crucial.

When establishing an investment fund, you must decide on the fund's structure, such as whether it will be an open-ended or closed-ended fund and the type of legal entity it will operate as. Each structure has different capital requirements, and it is important to consult with legal and financial professionals to ensure compliance with Hong Kong regulations.

Additionally, taxation requirements are crucial when setting up an investment fund in Hong Kong. The territory has a simple and clear tax system, which includes profits tax, salaries tax, property tax, and stamp duty. Profits tax is levied on the income generated by the investment fund, and it is important to understand the applicable tax rates and any available deductions or incentives. Consulting with tax specialists who can guide you through the tax registration process and ensure compliance with Hong Kong's tax regulations is highly recommended.

Choosing the right fund manager

When setting up an investment fund in Hong Kong, it is important to choose the right fund manager. The fund manager must comply with the Securities and Futures Commission's (SFC) "fit and proper" criteria. They must also have the minimum proven management skills and relevant recognised industry qualifications.

The fund manager has to perform regular valuations of the fund to calculate the net asset value. They are also responsible for ensuring the company meets the criteria on internal control, including matters such as auditing and training.

The Fund Manager Code of Conduct, which is applicable to fund managers of both private and retail hedge funds registered in Hong Kong, prescribes the main obligations fund managers have in relation to the hedge fund. For example, they need to safeguard the fund's assets and increase their value, but they can also be in charge of appointing a custodian. The fund manager has to ensure that the agreement between the fund and the custodian is drafted and signed according to the law.

To become the fund manager of a hedge fund, the person will need to obtain a Type 9 regulated activity license, and this is necessary regardless of the type of hedge fund registered in Hong Kong.

Frequently asked questions