HK-domiciled funds surge as MRF boosts city's appeal

Funds domiciled in Hong Kong have grown by nearly a quarter over the past year as the lure of mutual recognition gives the city’s funds an added advantage over rival financial centres.

The data from the city’s securities regulator has highlighted the appeal of distributing funds in mainland China.

And the increase contrasts sharply with the performance of Luxembourg and Irish funds, whose fund structure under the Ucits brand is sometimes seen by the industry as an alternative to Hong Kong-domiciled funds for distribution in the Asian retail market.

As of June 30 this year, 607 Hong Kong-domiciled funds were authorised in the city, a 22.9% increase from 494 funds at the same point in 2014, according to the Securities and Futures Commission’s (SFC) April-June 2015 quarterly report. The report was released yesterday.

Over the same time period, Luxembourg-domiciled funds authorised for distribution in Hong Kong grew to 1,007 funds, a year-on-year change of only 2.8%. Irish funds, of which 276 can be sold into the Hong Kong market, remained stagnant with no change.

On July 1, the SFC received the first batch of applications for Hong Kong-domiciled funds looking to distribute on the mainland under mutual recognition of funds (MRF).

Highlighting the role of Hong Kong as a hub for foreign investors to tap into the mainland market has been the increasing number of renminbi products in the city. The financial watchdog noted that four unlisted renminbi qualified foreign institutional investor (RQFII)/Stock Connect funds were authorised and one RQFII/Stock Connect exchange-traded fund received approval in this quarter. That brought the total number of RQFII/Stock Connect unlisted funds and ETFs to 72 and 21, respectively, as of 30 June.

The number of authorised funds has continued to rise, with 2,063 funds currently made available to the public by the SFC, representing a 5.2% increase compared to the same period last year.

Although starting from a low base, diversified funds have seen the biggest uptick, rising 10.2% in terms of authorised distribution to 108 by the end of June 2015. This was followed by bond funds rising by 8.6% to 404, index funds up 5.5% to 154 and equity funds seeing an increase of 4.1% to reach 1,015.

Meanwhile, the number of Cayman Islands-domiciled funds authorised by the SFC for retail investors in Hong Kong has fallen by 34.7%, with only 94 funds now available to the public as of June 30.

Alwyn Li, Hong Kong-based partner at law firm Deacons, noted that the drop could be attributed to such funds being re-domiciled back into Hong Kong to take advantage of mutual recognition.

The appeal of Hong Kong-domiciled funds over Cayman funds has been rising steadily, especially since 2006, noted Li. That year saw estate duty abolished in Hong Kong, meaning that funds domiciled in the city were on a par with Cayman funds, which did not have to pay estate duty.

In enforcement matters, the SFC disciplined four corporations and four licensed representatives during the quarter, and prosecuted two corporations and seven individuals in the magistrates’ courts.

The SFC also said it had helped 340 overseas investors recover $191 million in lost investment assets made with a fraudulent private equity group.