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Considerations for Setting up a Fund in Hong Kong

Why Hong Kong continues to offer alternative fund managers potential for investment and long-term growth.

The gateway to and from China, Hong Kong’s vibrant fund market provides access to a thriving financial hub. In 2023, net fund inflows to Hong Kong-domiciled funds increased 92.9% year-on-year[1].

As the largest financial center in Asia Pacific, Hong Kong is a hub for fundraising activity and capital markets. The market is particularly active as a platform for foreign direct investment into China and outbound direct investment from China to the world. Continued long-term growth and investment opportunities with the mainland make Hong Kong an attractive fund market.

When you add Hong Kong’s reputation as a well-governed financial center with a robust common law system and range of easy-to-understand fund structures there are plenty of reasons for fund managers and their investors to feel reassured.

Navigating legal and regulatory requirements in Hong Kong

Like other jurisdictions, Hong Kong has legal, compliance, and regulatory requirements to be met when setting up and administering a fund. The Securities and Futures Commission (SFC) is the principal source of regulation of asset management in Hong Kong, responsible for regulating the securities and futures markets. The SFC is one of four financial regulators in Hong Kong that cooperate to ensure proper conduct. The other regulators include the Hong Kong Monetary Authority (HKMA) which regulates financial institutions, conducts monetary policy operations, and manages the Exchange Fund; the Insurance Authority, which regulates and supervises the insurance industry; and the Mandatory Provident Fund Schemes Authority for the regulation and supervision of provident fund schemes.

Navigating the legal and regulatory environment in Hong Kong requires an understanding of the unique local business culture, and many alternative investment managers outsource administration locally to make it easier to ensure compliance. There’s also a trend for mainland China fund managers setting up in Hong Kong. Having Chinese-speaking professionals with a deep understanding of local governance practices is efficient when working through complex regulatory challenges and fulfilling local statutory requirements.

Anti-money laundering and know your customer regulations

Hong Kong is a member of the Financial Action Task Force (FATF), which sets international standards of anti-money laundering (AML) and counter-financing of terrorism (CFT). It is also a founding member of the Asia/Pacific Group on Money Laundering, a task force comprised of 41 member jurisdictions in Asia Pacific. Hong Kong’s AML/CFT framework includes know your customer (KYC) provisions, including customer screening, identification and verification, and reporting on unusual transactions.

Fund structures in Hong Kong

Funds can be established in Hong Kong in the form of unit trusts, open-ended fund companies, or limited partnership funds. Historically, alternative fund managers in Hong Kong have used Cayman fund vehicles, such as the exempted limited partnership.

With the 2020 launch of the Hong Kong Limited Partnership Fund (LPF) regime, there is now a viable alternative for Asia-focused managers seeking an onshore fund domicile. The regime was introduced to attract private equity and venture capital funds to register in Hong Kong and channel capital into corporates. There has been steady growth since the regime came into operation with nearly 800 funds now on the Limited Partnership Fund Register.

Considerations for launching a Hong Kong fund

Hong Kong’s proximity to China, reputation as a well-governed financial center, range of easy-to-understand fund structures, and its deep talent pool, are just some of the reasons investment inflows continue to grow. Developing a partnership with a high-quality service provider that can offer the benefits of an international network can smooth the way to success in this attractive and complex market.

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[1] Securities and Futures Commission Quarterly Report October-December 2023