Retail funds

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

A Hong Kong domiciled open-ended fund is set up by way of a trust deed governed by Hong Kong law and takes the form of a unit trust. The Securities and Futures (Amendment) Ordinance gazetted in 2016 provides the framework for open-ended investment funds structured in corporate form, and it is now possible to establish a Hong Kong domiciled open-ended fund in the form of an open-ended fund company structure with variable capital. Further detailed rules and requirements are contained in the Open-ended Fund Companies Rules (as a subsidiary legislation of the SFO) (the OFC Rules) and the Code on Open-ended Fund Companies (the OFC Code) issued by the SFC.

However, the UT Code does not restrict the authorisation of retail funds to Hong Kong domiciled funds. Other than Hong Kong domiciled funds, the SFC accepts applications for authorisation of non-Hong Kong domiciled funds or schemes. In addition, overseas-approved schemes may be authorised in Hong Kong, broadly speaking, under two available schemes: recognised jurisdiction schemes (RJS) and schemes to be authorised under mutual recognition of funds (MRF) arrangements.

The majority of RJS are undertakings for collective investment in transferable securities (UCITS) funds domiciled in Luxembourg, Ireland and the United Kingdom, although the current list of RJS also includes United States-registered investment companies, UCITS from France and Germany, Guernsey Class A schemes, certain funds from the Isle of Man and Jersey, Swiss collective investment schemes, and from the Asia-Pacific region, Malaysian Islamic collective investment schemes, Taiwanese exchange-trade index tracking funds and Australian managed investment schemes.

RJS are considered as already complying in substance with certain provisions of the UT Code by virtue of prior authorisation in a recognised jurisdiction, although schemes would still be subject to certain review by the SFC during the authorisation application process, for compliance with certain requirements under the UT Code, including regarding the management company and trustee or custodian of the RJS.

As for MRF, by virtue of Hong Kong entering into mutual recognition arrangements with specific countries or jurisdictions, publicly offered funds in such countries or jurisdictions may be recognised and authorised for offer to the Hong Kong public, subject to specific requirements and application processes. Likewise, Hong Kong funds authorised by the SFC may be registered for public offer in such other countries or jurisdictions. The ‘Mainland-Hong Kong Mutual Recognition of Funds’ initiative was launched in 2015, under which mainland and Hong Kong funds that meet the relevant eligibility requirements may apply for approval and authorisation for offering to retail investors in each other’s market. Under this initiative, more than 40 mainland funds have been authorised by the SFC for retail offer in the Hong Kong market, while more than 10 Hong Kong funds have been registered for retail distribution in the mainland domestic market.

To date, Hong Kong has also entered into respective MRF arrangements with France, Switzerland, the United Kingdom and Luxembourg.

While the above applies primarily to open-ended funds, other fund types, including exchange-traded funds (ETF), real estate investment trusts and closed-ended funds for retail offer, are also subject to authorisation by the SFC for offer to the public in Hong Kong, or to be listed on the Hong Kong stock exchange.

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The key legislation governing retail funds include:

  • the SFO;
  • the CWUMPO;
  • the SFC Handbook on Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Products (including the UT Code) (whereas retail funds structured as Hong Kong open-ended fund companies are also subject to the OFC Code); and
  • in respect of funds listed on the Hong Kong stock exchange, the Rules governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules).

As noted in question 1, there are regulatory requirements contained in various handbooks, codes, guidelines and FAQs containing requirements and expected standards of conduct that licensed fund managers or other intermediaries or market participants are subject to. The UT Code is the main code governing the authorisation and ongoing requirements applicable to retail funds, while licensed fund managers are further subject to the FMCC, as well as the Code of Conduct.


Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Retail fund products marketed and offered to the Hong Kong public must be authorised by the SFC in accordance with the UT Code, as described in question 3.

If such fund products seek to be listed on the Hong Kong stock exchange, they will be subject to Chapter 20 of the Listing Rules.


Who can market retail funds? To whom can they be marketed?

The marketing of retail funds (both open-ended and closed-ended) constitutes a regulated activity, and therefore only persons licensed with the SFC to conduct the Type 1 regulated activity of dealing in securities can carry out such activities.

Retail funds can be marketed to the public in Hong Kong. However, in the offering of fund products, the licensed person should further satisfy suitability and other know-your-customer requirements as set out in the Code of Conduct. In particular, offering of funds that are considered derivatives products would require specific assessment of suitability, including derivatives knowledge of the investor and a more stringent suitability standard.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

Managers of retail funds must satisfy the requirements as set out in the UT Code, which specifies that they must:

  • be engaged primarily in the business of fund management;
  • have sufficient financial resources - in particular, under the revised UT Code effective 1 January 2019, the minimum capital requirement for the management company is increased to HK$10 million (from previously HK$1 million); and
  • not lend to a material extent and maintain at all times a positive net asset position.

The management company is also expected to have at least two key personnel each with at least five years of investment experience managing public funds, although under the revised UT Code, a management company of established fund management groups may use group resources and expertise to meet this requirement.

The managers can be based in Hong Kong or other jurisdictions. If based in Hong Kong, the manager should be licensed for a Type 9 regulated activity of asset management. However, fund managers are not limited to Hong Kong licensed managers, as those regulated in jurisdictions within a list of acceptable inspection regimes (AIR) may be approved by the SFC to act as managers of retail funds, or as delegates to conduct discretionary management of SFC-authorised retail funds. The current AIR list includes, among others, Australia, France, Ireland, Luxembourg, the United Kingdom and the United States. Discretionary investment management functions can be delegated to non-AIR entities only upon the SFC’s prior approval.

The trustee or custodian of a retail fund needs to be acceptable to the SFC and must be one of the following categories of institutions:

  • a bank licensed under the Banking Ordinance of Hong Kong;
  • a trust company registered under Part VIII of the Trustee Ordinance that is a subsidiary of such a bank;
  • a trust company that is a trustee of Hong Kong pension schemes (a registered scheme defined under the Mandatory Provident Fund Schemes Ordinance); or
  • a banking institution or trust company incorporated outside Hong Kong, which is acceptable to the SFC.

Under the revised UT Code, trustees and custodians are subject to enhanced obligations to align with the standards imposed by the International Organization of Securities Commissions, particularly in relation to the appointment of sub-custodians. Further, trustees and custodians are required to appoint an independent auditor to periodically review its internal control and system. Such scope and level of review are expanded and extended.

The manager and the trustee or custodian must be persons independent of each other. If they are within the same group, they will be deemed as being independent of each other if they satisfy certain conditions (neither is the subsidiary of the other, no person is a director of both entities and they must sign an independency undertaking, etc).

Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

Certain investment and borrowing restrictions apply under the UT Code, depending on the type of retail fund. Core requirements primarily apply to ‘plain vanilla’ (equity or bond) funds, covering spread of investments and diversification limits, restrictions on certain types of instruments or assets and limits on short selling and borrowing. Other requirements apply to specialised schemes, such as money market or cash management funds, unlisted index funds, hedge funds, structured funds, closed-ended funds or funds that invest extensively in derivative instruments.

Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

SFC-authorised retail funds are generally exempt from Hong Kong profits tax.

At the investor level, generally, investors are not subject to Hong Kong tax in respect of distributions or dividends (if the fund is of corporate form) received, or in respect of any capital gains arising from a sale, redemption or disposal of the shares or units of an SFC-authorised retail fund, unless such receipt forms part of a trade, profession or business carried on in Hong Kong and fall to be regarded as profits sourced in Hong Kong.

Asset protection

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a retail fund must be held by a trustee or custodian; however, there is no requirement to appoint a separate local custodian. As noted in question 16, the trustee or custodian may be a banking institution or trust company outside Hong Kong that meets the requirements of, and is acceptable to, the SFC.

Requirements applicable to the trustee or custodian of the assets of retail funds are described in question 16. Under the UT Code, the trustee or custodian of a retail fund must take into its custody or under its control all the property of the retail fund, register cash and registrable assets in the name of or to the order of the trustee or custodian, and be liable for the acts and omissions of its nominees or agents in relation to assets forming part of the property of the fund.


What are the main governance requirements for a retail fund formed in your jurisdiction?

Once a retail fund is authorised by the SFC, there are ongoing compliance and reporting requirements under the UT Code. There is also an annual fee payable to the SFC to maintain the authorisation status of a retail fund.

The key facts statement of the retail fund (a summary of key fund features and terms, similar to a key investor information document of a UCITS fund) will need to be updated at least once a year, and reflect changes in the retail fund’s ongoing charges and performance.

Certain scheme changes may require prior approval of the SFC, whereas scheme changes that are not subject to SFC prior approval or are not material in nature may be subject to post-filing requirements.

For example, changes to a retail fund (eg, the addition of share class, change of fund manager or change of benchmark) do not require the SFC’s prior approval. Investors holding interest in such funds should be informed as soon as reasonably practicable of the changes as necessary to enable them to appraise the position of the scheme. The offering document of the fund may be updated and reissued without further authorisation provided the content and format of such document remains fundamentally the same as the version previously authorised, and the revised documents must be filed with the SFC within one week of the date of issuance.

Other changes that would require the SFC’s prior approval, and prior notification to investors before they can take effect, would be changes such as the following, which are of a material nature:

  • changes to constitutive documents;
  • changes to key operators (including trustee or custodian, management company and its delegates and Hong Kong representative of funds established outside Hong Kong) and their regulatory status;
  • changes in investment objectives, policies and restrictions of the fund (including the purpose or extent of use of derivatives), introduction of new fees and charges or increase in fees and charges outside of permitted levels, dealing and pricing arrangements or distribution policy;
  • any other changes that may materially prejudice holders’ rights or interests; and
  • deauthorisation merger or termination of a fund.

What are the periodic reporting requirements for retail funds?

Authorised retail funds must publish at least two financial reports each financial year, which are the annual reports and accounts published and distributed to holders within four months of the end of the fund’s financial year, and the interim reports within two months of the period they cover. These reports will need to be filed with the SFC.

Issue, transfer and redemption of interests

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

There must be at least one regular dealing day per month for retail funds, except for closed-ended funds authorised under the UT Code.

The maximum interval between the receipt of a properly documented request for redemption of units or shares and payment of the redemption money may not exceed one calendar month, unless a substantial portion of the investments is in a market that is subject to foreign currency control. Certain specialised schemes may have a longer maximum interval. Suspended or deferred dealing is allowed only in certain circumstances, such as during massive redemption, and there should be full disclosure in the offering documents on permitted circumstances.