Asia’s hedge funds sector had been growing in importance long before the financial crisis. While hedge fund managers and other financial services companies grapple with the uncertainties posed by proposals for tighter regulation of their businesses in the US and the EU, such as the draft Private Fund Investment Advisers Registration Act and the proposed Directive on Alternative Investment Fund Managers, jurisdictions such as Hong Kong are poised to take advantage and are witnessing an increasing number of relocations and start-ups, both from within the region and outside.
Among the main factors that support fund managers in Hong Kong are its low tax rates – the profits tax is 16.5 per cent – and a simple tax regime, with no value-added tax, capital gains tax or tax on interest, as well as a reasonable regulatory environment. Growing investor sophistication places compliance and regulation at the crux of any successful investment strategy. It has become increasingly evident post-Madoff that investors prefer managers to be based in jurisdictions that allow them to ‘tick the box’ of compliance and adherence to well-defined and established law and regulation.
Hong Kong continues to be the preferred destination in Asia. Although both Hong Kong and Singapore are close rivals as international fund management hubs for the Asia-Pacific region, the predominantly Western economic crisis has underlined the advantages of the Special Administrative Region. Factors that support its leading position in the region include the availability of high-quality legal and accounting services, fund administrators, prime brokers and custodians.
However, Hong Kong’s edge over its traditional rival is perhaps mainly due to its established regulatory framework. The territory has had a robust licensing regime for fund managers for some time, and while it may previously have lost out to Singapore’s more relaxed approach, clients now see value in being supervised in a centre with regulatory certainty.
Hong Kong’s regulator, the Securities and Futures Commission, has continued to welcome hedge funds, and it is noteworthy that the political hostility in Europe and the US toward alternative investment managers has not resulted in any corresponding changes to the Hong Kong licensing or short-selling regimes.
As conditions become more conducive to raising money, Hong Kong has also seen a higher number of start-ups, with 30 fund launches in 2009, compared with an estimated 16 for Singapore. The latter is also looking to revamp its regulatory regime, making market entry even harder. The Monetary Authority of Singapore published revised rules (FAQs) on January 26 regarding its exempt fund manager regime, which bears a close resemblance to the Hong Kong licence requirements.
In addition, Singapore can never compete with Hong Kong’s relationship with China and its immense potential. Following the Hong Kong-PRC Closer Economic Partnership Agreement of 2007 and subsequent changes in Chinese law the following year, the China Securities Regulatory Commission has allowed mainland fund managers to set up operations in Hong Kong.
An increasing number of Chinese fund managers have established a presence in the territory, launching offshore funds and even A Share ETFs. With Hong Kong’s positive tax system and regulatory stability, the jurisdiction’s asset management industry will grow further in 2010. Looking to the future, Hong Kong as a financial centre will clearly not only be about China inbound but China outbound as well.
Paul Li is country head and Rolfe Hayden is a partner at Simmons & Simmons in Hong Kong