New tax exemption seen drawing hedge funds to Hong Kong

Lobby group says more funds and private equity firms can be expected to set up in the city because of the government's proposed reforms

PUBLISHED : Monday, 03 June, 2013, 12:00am
UPDATED : Monday, 03 June, 2013, 3:32am

More hedge funds and private equity firms will set up in the city because of a government reform plan and the internationalisation of the yuan, industry representatives say.

Philip Tye, chairman of the Hong Kong branch of the Alternative Investment Management Association, a hedge-fund lobby group, said he expected more funds to domicile their products here because Financial Secretary John Tsang Chun-wah in February proposed to expand tax exemptions for private equity funds and to allow fund products to be structured more flexibly. Tsang made the proposal in his budget speech.

"The government reform plans, as well as the internationalisation of the yuan, are going to make Hong Kong more attractive to many hedge funds," Tye said.

"Hong Kong has always been an ideal distribution centre for fund managers to sell their fund products to Asian investors.

"The proposed reform plans would now make Hong Kong more attractive for fund companies to domicile their funds here. This will create job opportunities and benefit the hedge fund industry as a whole."

Of the roughly 1,700 funds in the city, about 300 are domiciled here. Most are domiciled in Luxemburg and Dublin, partly due to structural and tax issues.

A law change in 2006 granted a tax exemption to offshore funds investing in stocks and futures. The new proposal would expand the tax exemption to offshore private equity funds that invest directly in companies. Tsang's other proposal was to allow funds domiciled in Hong Kong to be established as a company. They are currently required to be trusts.

John Levack, vice-chairman of the Hong Kong Venture Capital and Private Equity Association, said the reform plan would attract more private equity funds to Hong Kong.

"Hong Kong is an excellent centre for private equity operations but without structural reforms, growth will be limited.

"The opportunity, however, is to act as the offshore centre for China funds and to be the Asian regional hub for those multinational private equity firms who are not yet present in Asia," Levack said.

That would double the number of private equity firms based in Hong Kong and create jobs for private equity fund managers and related professionals, Levack added.

In his budget speech, Tsang said the Hong Kong government was talking with mainland authorities about setting up a mutual recognition agreement so as to allow the cross-border selling of fund products. It would mean Hong Kong-based fund products could be sold in the mainland and vice versa.

"This proposed mutual recognition agreement would open a new chapter for the Hong Kong and mainland fund industries," said Lieven Debruyne, chief executive of Schroders Investment Management and chairman of the Hong Kong Investment Funds Association (HKIFA), which represents the asset management industry.

"Many international fund companies are eyeing how and when this proposal would be implemented and want to have details on how to best prepare ourselves for capturing the new opportunities that arise under this proposal," Debruyne said.

Local fund houses expected the details of the scheme to become available in the second half of the year.

Debruyne said the fund houses wanted to know more about the plan so that they could prepare to take advantage of the opportunities it presented.

Many HKIFA members would like to know if eligible funds would be subject to mainland tax.

"We consider mutual recognition a positive move for the Hong Kong fund industry. We will work with the regulators to get clarity around the details," Debruyne said, adding that the HKIFA would send a delegation to the mainland regulator.