Cayman funds shrink in Hong Kong

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Locally-domiciled funds in Hong Kong continue to grow, while Cayman Island funds saw a drop in number and assets, according to the Securities and Futures Commission’s second quarterly report.

The number of Cayman Islands funds dropped 31.7% to 41 at the end of June from the previous year. Assets also fell 21.5% – the biggest decline among all fund structures in Hong Kong – to $8.8bn during the same period, according to the report.

Funds domiciled in Ireland, UK and Bermuda also saw a decline in number and assets in Hong Kong.

One of the factors that have caused the decline in Cayman funds is the introduction of variable fund structures in the territory.

In Hong Kong, the SFC implemented the open-ended fund companies (OFC) regime last month, while the Singapore Variable Capital Company (S-VACC) is expected to be in place at the beginning of next year.

The implementation of these fund structures is expected to have an immediate impact on Cayman Islands-domiciled funds, which are usually products set up by private equity and hedge fund managers, Eric Roose, Singapore-based partner at law firm Withers Khattarwong, told FSA previously.

He added that a number of institutional investors in Europe, such as pension funds, have investment policy guidelines that prohibit them from investing in Cayman-structured products.

Investors have also become increasingly resistant to Cayman funds, Roose said, noting that it could be for a number of reasons. “I don’t know whether it is the Panama Papers.”

HK domicile increases

Hong Kong-domiciled funds had the largest increase in number among all fund structures (2.7%, to 765 funds) and now represent 35% of SFC-authorised mutual funds, according to the SFC report.

However, Luxembourg-domiciled funds continue to dominate Hong Kong’s industry. There are 1,028 Luxembourg-domiciled funds with $1.06trn in assets, which account for 67% of mutual fund assets in the territory.

Offshore funds, especially Ucits, are still expected to grow in Asia despite regulators’ determination to grow an onshore industry by developing local structures, according to a Cerulli Associates report. In Asia, Ucits account for 65% of the combined AUM of funds in Hong Kong, Singapore and Taiwan.

“Both locally-domiciled and Ucits products will have a complementary role to play in offering investors their choice of products with exposure to relevant investment strategies,” Leena Dagade, associate director at Cerulli, said in the report.

Number of SFC-authorised funds by fund domicile

AUM of SFC-authorised funds by fund domicile

Source: Securities and Futures Commission

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