In July last year, the Securities and Futures Commission (SFC) implemented the open-ended fund companies (OFC) regime, which enables investment funds to be established in corporate form in Hong Kong, in addition to the current unit trust structure.
However, after nearly a year later, no asset manager has used the new structure, according to Jeremy Lam, Hong Kong-based partner at law firm Deacons.
“The SFC’s intention when they came up with this was simply to offer another fund structure for Hong Kong-domiciled funds. There was really no expectation that there’s going to be a sudden flood of new corporate structures,” Lam said at a recent media briefing.
One reason is that both the OFC and unit trust structures are very similar, making the cost-benefit proposition of shifting unappealing.
“In terms of overall operational running costs, I think it will be equivalent for those types of structures.”
The only disadvantage for OFCs, however, is that since it is a corporate structure, firms will have additional regulatory obligations with their registry, which is not required for unit trust investments, Lam said.
More updated structure?
Eleanor Wan, CEO of Bea Union Investment, believes that there may be some advantages with the OFC structure. Given that it is new, it may be more adaptable to industry changes.
“[The two structures] are not much different. But since the unit trust was set up a long time ago, there might be some clauses [that may be outdated]. Moving into an OFC may provide more efficiency to our operation,” Wan told FSA.
Wan was not able to provide concrete examples, but noted that the firm is mulling plans to adopt the new structure, with its sales teams and legal advisers working with the SFC.
“It is still a brand new structure, so at the moment we are still working together with the regulators.”
Deacon’s Lam said that a change in regulation in Cayman Island-domiciled funds may drive hedge and private fund managers to transfer into locally-domiciled funds.
Driven by the Organisation for Economic Co-operation and Development (OECD), Cayman funds will be subject to an “economic substance requirement”, in which a certain amount of business needs to be conducted in the Cayman Islands, according to Lam. The new regulation will take effect on 1 July.
“Recurring expenditure and income should be generated out of the Cayman Islands, and you have to employ a sufficient number of people based in the jurisdiction,” he explained.
This will be a problem for a number of hedge fund and private fund managers, as many of them are set up in the Cayman but are delegating key tasks outside the jurisdiction.
“Hedge fund managers won’t like this, as they still want to choose a jurisdiction that is regulation-light,” he said.
With the new regulations, fund managers might instead opt for locally-domiciled fund structures, which includes the OFC in Hong Kong, he said.
A move toward locally-domiciled structures may also be investor-driven, Lam added, noting that investors are slowly looking at more regulated products for their own protection.
“The pendulum is swinging, in which investors are looking at the regulation around the fund. What you are going to see over time is that investors will look into businesses with jurisdictions where the management entity and the fund are subject to some level of regulation.”
Bea Union’s Wan shares Lam’s view of the shift from Cayman to locally-domiciled structures. However, she noted that locally-domiciled structures will never replace Ucits funds.
“I do not think there will be one structure that fits everyone. It really depends on your clients. But for offshore arrangements, Ucits would still remain in a very dominant place, because they share the beauty of global distribution.”
She also added that in terms of distribution, private banks prefer Ucits funds.
“There is a common understanding that private bankers welcome the Ucits structure much better because they are very familiar with it.”