Non-retail pooled funds

Available vehicles

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

A non-retail fund in Hong Kong may be formed as a Hong Kong domiciled unit trust constituted under a trust deed governed by Hong Kong law. 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 Hong Kong domiciled open-ended funds in the form of an open-ended fund company structure with variable capital. Further detailed rules and requirements are contained in the OFC Rules and the OFC Code promulgated and issued in 2018.

However, non-retail funds that may be offered in Hong Kong on a private placement basis, primarily to ‘professional investors’, as defined under the SFO, are not restricted to Hong Kong domiciled funds or specific forms. Hong Kong managers may adopt legal vehicles domiciled in other jurisdictions when establishing non-retail funds and quite commonly do, subject to:

  • considering ease and costs of establishment and operation;
  • applicable legal and regulatory requirements in the jurisdiction of the fund domicile;
  • familiarity to investors and other factors that may be relevant under the manager’s or the group’s management and operational structure; and
  • other potential factors, such as tax implications or any proposed registration or listing in any market.
Laws and regulations

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

Non-retail funds are primarily subject to the SFO regarding offers of securities (including forms of collective investment schemes widely defined) in Hong Kong or to the Hong Kong market, including applicable requirements relating to offers to professional investors. Persons engaged in the business of offering investment funds, including non-retail funds, are required to be licensed by the SFC to conduct the Type 1 regulated activity of dealing in securities, unless any relevant exemption applies.

A Hong Kong manager of non-retail funds is required to be licensed by the SFC to conduct the Type 9 regulated activity of asset management, and is thereby subject to regulation by the SFC in its business of managing the non-retail funds, including applicable requirements under the Code of Conduct and the FMCC.

Authorisation

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

Non-retail funds are not subject to authorisation or registration requirements in order to be established or marketed in Hong Kong.

Marketing

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

As noted in question 24, persons engaged in the business of offering investment funds, including non-retail funds, are required to be licensed by the SFC to conduct the Type 1 regulated activity of dealing in securities, unless any relevant exemption applies.

Non-retail funds should not be offered to the public, and under Hong Kong securities offering laws, an offering is not a public offer where (among other circumstances that may qualify and apply to exclude the offer as a public offer) it can be offered to an unlimited number of professional investors, or to no more than 50 people (not limited to professional investors).

In brief, professional investors refer to institutional investors, such as financial institutions and specific bodies as prescribed in the legislation, or individuals or corporates that meet the relevant minimum net-worth or net assets requirements (broadly speaking, individuals with a portfolio of at least HK$8 million or a corporation or partnership with a portfolio of at least HK$8 million or net assets of HK$40 million).

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

Non-retail funds are typically offered to professional investors only, although, as noted in question 26, it is permitted under Hong Kong law to offer a non-retail fund to no more than 50 people by way of private placement. For non-retail funds of a Hong Kong corporate form, other exemptions apply, such as an offer involving at least HK$500,000 or not exceeding a specific overall size.

Managers and operators

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

A Hong Kong manager of non-retail funds is required to be licensed by the SFC to conduct Type 9 regulated activity in asset management, and is thereby subject to regulation by the SFC in its business of managing the non-retail funds. Non-retail funds that are not managed in Hong Kong are not subject to specific requirements by the SFC, other than the securities offering restrictions and the requirement for persons engaged in the marketing of the non-retail funds to hold a licence by the SFC to conduct the Type 1 regulated activity of dealing in securities.

Effective from November 2018, under the revised FMCC, Hong Kong-licensed managers of non-retail funds are subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund, specifically covering several areas that are considered risk areas and for managing systemic risks, such as in relation to:

  • general market conduct;
  • securities lending and repurchase agreements;
  • custody;
  • use and disclosure of leverage;
  • liquidity management;
  • risk management;
  • valuation;
  • use of side pockets; and
  • managing conflicts of interest.
Tax treatment

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

Hong Kong has a new profits tax exemption regime effective 1 April 2019, which essentially provides exemption from Hong Kong profits tax for any vehicle that meets the definition of ‘fund’ under the IRO (which mirrors the definition of ‘collective investment scheme’ in the SFO) in respect of ‘qualifying transactions’ and ‘qualifying assets’. Furthermore, the said profits tax exemption requires that the qualifying transactions for the tax exemption are carried out through or arranged by a ‘specified person’, meaning a corporation licensed or registered for carrying out specified regulated activity under the SFO and which would include Hong Kong licensed managers.

Asset protection

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

Non-retail funds are not subject to specific requirements in Hong Kong regarding custodian or custody of fund assets, as non-retail funds are not under specific regulations in Hong Kong other than as regards the offer of securities or through the regulation of Hong Kong managers of non-retail funds.

Under the revised FMCC effective from November 2018, Hong Kong-licensed managers of non-retail funds are subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund. Specifically, the revised FMCC introduces specific requirements on the fund manager to exercise due skill, care and diligence in the selection and appointment of the custodian (or trustee, in the case of a unit trust structure) and ongoing monitoring of the performance of the functions of the custodian or trustee. The revised FMCC also sets out in detail the matters that should be taken into account in considering whether a custodian is properly qualified and the expected eligibility of a custodian, as well as containing requirements on the custody agreement and the disclosure of custody arrangements to fund investors.

Governance

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

As non-retail funds are not under specific regulation in Hong Kong other than as regards the offer of securities or through the regulation of Hong Kong managers of non-retail funds, non-retail funds are not subject to specific governance requirements, such as registration, record-keeping or filings.

However, further to the Securities and Futures (Amendment) Ordinance gazetted in 2016 that provides the framework for open-ended investment funds structured in corporate form, and subject to the detailed rules and requirements in the OFC Rules and the OFC Code, non-retail funds to be established as Hong Kong open-ended fund companies are subject to prior approval by the SFC under a registration process and must meet certain key requirements with respect to the manager, the directors, the custodian and other governance requirements.

Reporting

What are the periodic reporting requirements for non-retail funds?

As non-retail funds are not subject to specific regulations in Hong Kong, other than regarding the offer of securities or through the regulation of Hong Kong managers of non-retail funds, they are not subject to specific governance requirements such as registration, record-keeping or filings.

However, under the revised FMCC effective from November 2018, where a Hong Kong-licensed manager is responsible for the overall operation of a non-retail fund, there are additional specific requirements on fund valuation and calculation of net asset value, and on appropriate policies and procedures for valuation of fund assets. The manager is also expected to ensure an independent auditor is appointed to perform an audit of the financial statements of the fund in order to provide audited reports at least annually, to be made available to fund investors.