Yip, who focuses her work in the council on finding ways to promote the local fund industry, said many overseas private equity funds are set up in the form of limited partnerships, a structure that is not available in Hong Kong.

"If the Hong Kong government would consider introducing a change in the law to allow private equity funds or certain non-retail fund products to be set up as limited partnerships, it would attract more international fund houses to set up such funds here and hence promote the fund industry in Hong Kong," she said in an interview.

Yip said the council has submitted this suggestion to the government and hopes consultation on it will be undertaken soon.

Investors enter a limited partnership as passive limited partners with limited liability and are not involved in the management and investment of the funds, which are the duties of a general partner. The general partner may delegate these duties to other fund managers.

"Such limited partnerships are popular in the US and Europe, as they allow more flexibility to investors and fund managers. The law on the mainland also allows onshore limited partnerships for private equity funds, but such structures are not allowed in most Asian cities, including Hong Kong and Singapore," Yip said.

Hong Kong allows a fund to be set up as a trust, which many fund managers complain is not a suitable structure for private equity funds.

"For Hong Kong to compete for the role as the Asian hub for international funds, which will domicile here, the city has to allow private equity funds to be set up in a more flexible way," Yip said.

Currently, among the 1,800 retail funds with operations in the city, only about 300 are domiciled in Hong Kong, with the rest mainly based in Europe. Their fund administration functions are mainly based in Dublin and Luxembourg.

There are no private equity funds domiciled in Hong Kong.

According to a PwC report, 64 per cent of private equity funds are domiciled in the US state of Delaware, and 15 per cent in the British dependency of Jersey.

The Cayman Islands are the most popular home base for hedge funds, 45 per cent of which are domiciled there, 20 per cent in Delaware and 12 per cent in Jersey.

The FSDC proposal comes at a time when the Hong Kong government has stepped up its efforts to promote the fund industry globally.

Financial Secretary John Tsang Chun-wah said in his budget speech in February that the government would propose changes in the law to extend exemptions from the profits tax to offshore private equity funds.

He also planned changes to allow Hong Kong funds to set up as open-ended investment firms, instead of trusts as required under existing rules.

In another move to attract international funds, the government is in talks with mainland authorities on a mutual recognition agreement for the cross-border selling of funds. That would mean Hong Kong-domiciled funds could be sold on the mainland and mainland funds could be sold in Hong Kong.

Yip said the FSDC would continue to advise the government and work out details of these proposals to ensure they could cover a wide range of funds.

"Hong Kong is in a good position to become a domicile hub for Western fund managers that aim to invest in Asia or to sell in Asia. There is no other Asian city that can offer the same role yet," Yip said.

"A quick change to allow tax exemption and more flexible structures for the funds would help Hong Kong position itself as an international hub for the fund industry."