The Status of Hong Kong Open-ended Fund Companies (OFCs)
28 February 2024
DAVID CAMERON LAW OFFICE (DCLO) LEGAL UPDATE:
A Status Update on Hong Kong Open-ended Fund Companies (OFCs)
As of the end of February 2024, there were 764 Open-ended Fund Companies ("OFCs") established in Hong Kong. OFCs are a collective investment scheme structured as a company with variable capital. This 764 figure is since the introduction of the OFC which was in June 2018. There are no OFCs showing as having been registered in 2018 and only one for the entire year of 2019. Excluding that first year and a half with only one OFC, there have been on average 17.4 OFCs established per month. That seems like a small number given Hong Kong's status as a leading international financial centre.
"There have been an average of 17.4 OFCs established per month"
In the backdrop is the fact that the Hong Kong government has been subsidising the cost of OFC establishment up to HK$1,000,000 (US$128,000) per OFC. With a cap of three subsidised OFCs per manager, that is up to HK$3,000,000 (US$384,000) in cost savings for that one manager. This grant scheme is slated to end soon, on 9 May 2024. Inevitably the adoption of new vehicles by market participants can take time, but the OFC could be at an inflection point and lose steam come the end of the subsidy.
Similarly, Singapore launched is Variable Capital Company ("VCC") regime in January 2020, but those numbers also only stand at approximately 1,000 VCCs established, only slightly more than Hong Kong OFCs. Singapore's VCC regime is also subsidised.
Informal feedback, sourced by DCLO, from market participants is that OFCs are less attractive due to (i) expense (even with the subsidy), (ii) Hong Kong Securities & Futures Commission ("SFC") regulation and (iii) market conditions. On the last point, current market conditions are not conducive to investment vehicles designed to take on a large number of Limited Partners ("LP"), like the OFCs. Instead, investment managers and other market participants are finding Hong Kong Limited Partnership Funds ("LPFs") an attractive option because they are better suited for a small number of LPs. LPFs are also less expensive to set up (in some cases, substantially less expensive) and are not regulated by the SFC, which addresses the first two points.
DCLO is also a witness to this trend, as we have set up numerous LPFs for our clients but observing less interest when it comes to OFCs. It will be interesting to see the trend line for OFCs once the subsidiary ends in early May.
To contact the author:
David Cameron
Principal
David Cameron Law Office