For a long time now Hong Kong has been viewed as one of the biggest capital markets in the world. Also, it holds second place after mainland China in direct investments in Asia. We will now briefly discuss the regulation of PEFs in Hong Kong.
FDI regulation
Direct PEFs are regulated and controlled in order to organize the financial relations of collective investors and to manage the movement of financial resources. Thanks to this approach, the whole investment market becomes more reliable and attractive for other investors.
In Hong Kong, the function of the main regulator over private investments is performed by the Securities and Futures Commission. Among its tasks belong activities such as:
- Making sure that direct PEFs in HK fulfill all necessary provisions regarding management and marketing;
- Granting licenses and monitoring activities of FDI managers and consultants.
For those who would like to set up a PEF in Hong Kong, approval from the Commission is the first step that needs to be taken.
Investors and risks
Both individuals and legal entities can be professional investors. According to the rules of the Special Administrative Region of China, investors must obtain a status of a local investor if the fund interests are realized there. A special form must be filled out and submitted.
Primarily, direct PEF investors face financial and operational risks. Yet there are also other risk types that put in danger the investment qualities of securities: credit, liquidity, or counterparty risks.
To elaborate on the risk types, liquidity risks come up when obligations to redeem the fund’s securities cannot be done for a rational price. Another type: operational risks happen during trading, settlement, evaluation procedures. These processes are associated with the possibility of a human or technical mistake.
Registration structures
In Hong Kong, investors have an opportunity to register their PEF as one of several structures. Usually, these general forms of funds are used:
- Partnerships;
- Companies with the GP;
- Investment companies (taking into consideration the rules of offshore jurisdictions).
Moreover, it is crucial to remember that licensed legal entities that provide services or conduct activities outside HK should make sure to comply with the regulatory and legal requirements of the relevant jurisdiction.
Fund manager license
Among all other regulated activities in Hong Kong, fund managers should pay close attention to these kinds. Each of them requires a license:
- Securities advisory – a Type 4 license should be obtained by managers who provide investment advice. An exception may take place in case all the activities are related to the following license type;
- Trading in securities – a Type 1 license should be obtained by those who are involved in securities sales. In addition, this type might be needed for closing deals with private capital;
- Asset management – a Type 9 license must be obtained in order to be able to provide portfolio management services as well as to make investment decisions for clients.
If you are planning to register a PEF in Hong Kong and need advice on obtaining a license, do not hesitate to contact COREDO.