Cayman fund numbers slump in Hong Kong

Dec 15, 2014

The number of Cayman Islands funds authorised in the city has fallen 30% this year against a rise in HK-domiciled funds. Retail structured product volumes have also dropped heavily.

This year has seen a 30% drop in the number of Cayman Islands funds authorised in Hong Kong, as the city grows in popularity as a product domicile ahead of the pending HK-China mutual recognition scheme.

The number of Cayman-originated funds fell to 103 at end-September from 146 at the end of March, according to Hong Kong's Securities and Futures Commission (SFC). During the same period, the number of HK-originated funds rose 16.8% to 548 from 469. This continued trends evident since September 2013.

Over the same period, there was a year-on-year rise of 20.2% in the number of SFC-authorised trusts and funds with "diversified" underlyings – this was the biggest gain in terms of product type.

This comes amid a global crackdown, led by the US, on offshore tax havens and the imminent launch of the mutual recognition scheme for funds. The latter will mean HK-domiciled products can be sold into mainland China.

Meanwhile, a separate SFC report released on Friday has highlighted how Hong Kong individual, non-professional investors’ appetite for risk has been rising, alongside a shrinking demand for structured products.

The regulator surveyed sales of investment products in the city between April 1, 2013 and 31 March, 2014 and compared this to its previous such survey from April 1, 2011, to March 31, 2012.

The latest report revealed a $35 billion increase in the sale of non-investment-grade corporate bonds and a $17 billion drop in sales of investment-grade corporate bonds and sovereign bonds.

“Respondents advised that the increase in the sale of non-investment-grade corporate bonds was mainly attributable to clients’ demand and active issuance and sale of fixed income products to individual investors by some firms," said the SFC report.

Corporate bonds significantly outsold sovereign bonds over the latest period, which only contributed about 4% of the total transaction amount during the latest survey's period. Between 2013 and 2014, $110 billion worth of corporate bonds were sold, compared to $5 billion of sovereign bonds; but during the previous survey, corporate bond sales were worth just $87 billion, compared to sovereign bond transactions of $10 billion.

Meanwhile structured investment products’ share of total transactions during the period fell substantially to 37% ($172 billion), compared to 65% ($329 billion) in the SFC’s previous survey. Currency-linked products, such as accumulators and decumulators, suffered the biggest decline, with volumes dropping by about $114 billion.

Investment products covered in the survey included structured investment products, government and corporate bonds, swaps and repos, collective investment schemes and hedge funds. Among those not included were leveraged foreign exchange products, insurance products, mandatory provident funds, pooled retirement funds, paper gold schemes, listed securities, exchange-traded funds and exchange-traded derivatives.

The survey was sent to 1,465 corporations licensed to deal in or advise on securities or futures, and the SFC received 1,439 replies. A total of 213 licensed corporations reported that they had sold investment products to individual investors during the reporting period.