Hong Kong open-ended fund company – a year in review

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Authored by: Fiona Fong and Iris Yeung

Overview

The open-ended fund companies (OFC) is a Hong Kong-domiciled fund structure. It is an important part of the Hong Kong Government’s proactive policy strategy to strengthen the city’s competitiveness in the international asset management market.

Strong growth in 2022

The OFC was introduced in July 2018 and has experienced momentous growth since 2021.

As of 31 December 2022:

• 112 OFCs (including umbrella and standalone funds) and 208 sub-funds were registered with the Securities and Futures Commission (SFC), being the primary regulator of this local fund structure;
• approximately 9% are authorised to be offered to the public;
• approximately 12% are listed as ETFs for trading on the Hong Kong Stock Exchange;
• approximately 79% are private OFCs.

While there were only eight OFCs established between 2019 and 2020, the number of OFCs set up in 2021 grew significantly (48 OFCs) and reached a new high (112 OFCs) by the end of 2022, representing a growth of approximately 133% in 2022.

Amongst the OFCs in existence, eight umbrella OFCs are authorised to be offered to the public, nine umbrella OFCs are ETFs and 95 are private OFCs (including a mix of umbrella and standalone funds). During 2022, there were a few high-profile OFC launches, including a blockchain-themed ETF by Pando Finance and Philip Capital’s ETF tracking an innovative index that represents the performance of Hong Kong newly listed equities. Deacons acted for the investment manager on both these products.

As of 31 December 2022, the majority of OFCs were set up as an umbrella structure rather than standalone. There are, in aggregate, 96 umbrella OFCs with 208 sub-funds, returning an average of around two sub-funds per umbrella. Fund managers tend to set up two or more sub-funds at the initial incorporation of an OFC.

In terms of investment themes, a look at the names of the OFCs and sub-funds established over the course of 2022 shows that the investment universe has expanded from traditional equities and fixed incomes to cover technology, healthcare, tele-communication, mining, ESG and AI-usage. The geographical span of investments is widely spread across the U.S., Europe, the Mainland and Hong Kong, Asia and various emerging markets.

OFC grant scheme

The grant scheme for open-ended fund companies and real estate investment trusts (Grant Scheme) has been running for 18 months. It was introduced in May 2020 by the Hong Kong Government in an effort to promote the OFC regime. The Government has made available HK$270 million for the Grant Scheme, which covers eligible expenses paid to Hong Kong-based service providers incurred in relation to the incorporation or re-domiciliation of an OFC. The grant amount for each application is equivalent to 70% of the eligible expenses, subject to a cap of HK$1 million per OFC and a maximum of three OFCs per investment manager.

More than half of the Grant Scheme has already been committed and paid to fund managers in Hong Kong. As of 30 September 2022, around HK$140 million remained available. The Grant Scheme will expire in 16 months (9 May 2024) unless it is otherwise committed in full earlier.

Highlights in 2022

November 2022

The SFC clarified exemptions in relation to preparing and publishing annual reports. Any unlaunched OFCs or sub-funds without any investors can apply to the SFC for an exemption. An OFC or its sub-fund is generally considered not to have been launched if no subscription proceeds for participating shares (excluding management shares) have been received. Our November newsletter provides further details.

September 2022

The SFC updated the OFC Frequently Asked Questions to clarify that authorised Islamic OFCs are eligible under the scope of the mutual fund recognition arrangement entered into by the SFC and the Securities Commission of Malaysia. Other jurisdictions which recognise SFC authorised OFCs include Switzerland, France, the United Kingdom, Luxembourg and the Netherlands.

April 2022

In April 2022, Deacons led the first ever case of re-domiciliation, successfully bringing a standalone fund domiciled in the Cayman Islands to Hong Kong as a standalone OFC. The re-domiciliation scheme is attractive to fund managers who are managing existing offshore Cayman funds. Under the scheme, there is no change in the legal entity of the fund upon re-domiciliation, and any contracts, rights and obligations the fund has entered into will not be affected by making the move to Hong Kong; accordingly, the track records of existing offshore funds can be maintained and continued. It is also worth noting that the Government’s Grant Scheme referred to above equally applies to re-domiciliation.

Our April newsletter provides further insight into the re-domiciliation process.

For 2023, we look forward to another active OFC year.

Key Contacts

Fiona Fong

Partner | Financial Services

Email or call +852 2826 5316