Hong Kong’s new legal framework for open-ended fund companies (OFC) took effect yesterday following the completion of a legislative process this month.
OFC is an open-ended collective investment scheme which is structured in the corporate form with limited liability and variable share capital.
Under the OFC regime, fund managers will have the option of setting up a Hong Kong domiciled fund in the form of a company, in addition to the form of a unit trust.
Open-ended investment funds in unit trust form are widely understood and accepted in common law jurisdictions and have long existed in Hong Kong.
However, the more popular fund structure from an international perspective is the corporate fund structure. This structure is available in most major fund centres.
The new OFC regime is expected to face competition when Singapore variable capital companies and Australia's corporate collective investment vehicles company regimes go live.
While the fund industry is supportive of the introduction of the new OFC structure in Hong Kong, one of the key issues concerning the new fund structure is the level of take up by the private sector, law firm Clifford Chance said in its client briefing note.
Unlike funds structured as a unit trust, the establishment of a private OFC will involve more supervision by Hong Kong’s Securities and Futures Commission.
There is concern that the establishment and ongoing operation of a private OFC are more burdensome than similarly structured private fund vehicles in other domiciles, Clifford Chance said in its note.
Hong Kong and Asia-based managers prefer to domicile equity and hedge funds predominantly in Cayman Islands owing to its comparatively more flexible and lightly-regulated structures.
What’s more, the investment scope for private OFCs is designed for funds whose objective is to manage asset types which fall under a Type 9 (asset management) regulated activity, with a 10% buffer to invest in other asset classes.
This will be fine for most equity or hedge funds, but might be problematic for other asset classes, such as real estate, infrastructure, commodities and others, Clifford Chance said in its note.