The Hong Kong government has quietly launched an incentive scheme that will grant fund managers up to HK$1 million (US$129,000) to cover their expenses for launching funds under the new open-ended fund company (OFC) structure in a bid to boost the city’s position as the investment funds gateway to China’s Greater Bay Area (GBA).
The incentive scheme, which was announced by the Securities and Futures Commission (SFC) on May 10, applies to OFCs successfully incorporated in or re-domiciled to Hong Kong as well as to SFC-authorized real estate investment trust (Reit) listed on the Hong Kong stock exchange. It provides up to 70% of eligible expenses paid to Hong Kong-based service providers, subject to a cap of HK$1 million per OFC and up to HK$8 million per Reit. The incentive scheme will operate for three years and is already open for application on a first-come-first-served basis.
“By encouraging a broader range of investment vehicles, the grant scheme will reinforce Hong Kong’s role as a leading capital raising venue and its status as an international asset and wealth management centre,” says SFC chief executive officer Ashley Alder.
The offering of the OFC incentive scheme mirrors a similar move by the Monetary Authority of Singapore (MAS), which also offers incentives to encourage the use of the Variable Capital Company (VCC) structure that also seeks to encourage more fund companies to domicile in Singapore. The VCC incentive scheme began on April 16 2020 and will last up to January 15 2023.
The expenses that are covered under the incentive scheme include fees charged by law firms to incorporate/re-domicile an OFC, such as drafting the instrument of incorporation and offering documents of the OFC.
Also covered are fees charged by auditors, accountants, or tax advisers for accounting or tax services (or both) in relation to incorporating/re-domiciling an OFC, as well as fees charged by fund administrators for incorporation/re-domiciliation services in relation to the set-up of an OFC.
The incentive will also cover fees charged by regulatory consultants for work done in relation to incorporation/re-domiciliation of an OFC and authorization of an OFC with the SFC.
Not included in the OFC incentive scheme are expenses involving running costs, such as monthly fees for fund administration, fees charged for annual audits, and statutory fees such as registration or application fees to the SFC for licensing or registration of an investment manager.
For private OFCs, formal applications must be submitted to the SFC within three months from the date of the certificate of incorporation or certificate of re-domiciliation issued by the Company Registry.
For public OFCs, applicants may submit to the SFC a duly signed and completed Public Open-ended Fund Companies – Confirmation of Intention to Apply for a Grant under the Grant Scheme for Open-ended Fund Companies as part of their product application submission. The application form and supporting information must be submitted to the SFC within three months from the date on which the authorization of the public OFC becomes effective.
For Reits, formal applications must be submitted to the SFC within three months after the listing date of the trust.
More flexible and efficient
The OFC structure is considered more flexible and efficient than the unit trust structure because the board of directors, who are also the fund managers, will also be in charge of the fund operations. This is unlike a unit trust structure, where the board/owners of the fund are traditionally different from the fund managers, who are more familiar with market developments, resulting in a gap in decision-making, especially under highly dynamic conditions.
In recent months, Hong Kong fund managers have begun to see the advantages of the OFC structure as a means of tapping wealth management opportunities in China, particularly in the Greater Bay Area, versus the more traditional unit trust structure.
Traditionally, the preferred fund structure for Hong Kong mutual fund managers was the unit trust, while hedge fund managers preferred the offshore limited liability company, typically domiciled in the Cayman Islands.
With the upcoming launch of the Wealth Management Connect scheme for the GBA, however, there is a growing consensus among fund managers that the unit trust structure, in particular, will be too unwieldy and cumbersome to be responsive for the fast-paced and highly dynamic markets that will evolve in the GBA.