The Securities and Futures Commission of Hong Kong (“SFC”) issued a circular on 17 February 2025, clarifying the requirements for closed-ended funds seeking a listing on the Stock Exchange of Hong Kong Limited (“SEHK”). This marks the latest initiative by the Hong Kong government to broaden distribution channels for private equity funds, following the launch of the New Capital Investment Entrant Scheme (as discussed in our previous article) and the expansion of the tax concession regime for funds and single-family offices.
While it was always possible for closed-ended funds to be authorised by the SFC, the latest circular offers much needed clarity on how the requirements apply in the case of alternative asset funds (“Alternative Funds”) that invest mainly in private and less liquid assets.
Quick recap: existing authorisation requirements on closed-ended funds
The authorisation conditions of closed-ended funds are mainly contained in Chapter 8.11 of the Code on Unit Trusts and Mutual Funds (“UT Code”), which include:
- the units/shares of the fund must be listed and traded on the SEHK;
- there must be procedure(s) and mechanism(s) in place for the fund to be widely held;
- there must be fair and equitable measure(s) and mechanism(s) in place to address any prolonged significant discount of the fund’s secondary trading price on the SEHK to its net asset value (NAV), e.g. the provision of specified redemption window(s);
- the redemption settlement timeframe should not exceed 90 days unless otherwise justified by specific circumstances;
- certain specified matters must require investors’ prior approval;
- the fund should comply with additional disclosure requirements regarding publication of NAV, risk factors, and the measure(s) and mechanism(s) in place to any prolonged significant discount of trading price; and
- any proposal of redemption, takeover, merger, amalgamation or restructuring must be subject to prior consultation with the SFC to ensure fair and equitable treatment to all investors.
Notably, in addition to the conditions above, closed-ended funds must also comply with other applicable provisions in the UT Code, including the relevant investment restrictions in Chapter 7 and/or Chapter 8, which are primarily geared toward open-ended funds investing in liquid assets. For example, it is a requirement under the UT Code that the value of a fund’s investments in securities or instruments that are neither listed, quoted nor dealt in on any market may not exceed 15% of its NAV[1]. Restrictions such as this pose a major challenge for Alternative Funds seeking authorisation in Hong Kong. As of the date of this article, there is only one listed closed-ended fund in Hong Kong[2].
Given the units/shares of the fund must be listed and traded on the SEHK, the fund must also comply with Chapter 20 (Investment Vehicles – Authorised Collective Investment Schemes) of the Main Board Listing Rules (“Listing Rules”).
The latest development: SFC clarifies its considerations for authorising Alternative Funds
The latest circular issued by the SFC provides useful guidance on its regulatory expectations with respect to Alternative Funds seeking authorisation and listing on the SEHK. These are summarised in the table below[3]:
7.3 of the UT Code.
The fund invests primarily in listed shares.
Unless otherwise specified, the Overarching Principles Section (“OP”) of the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products, and the UT Code will continue to apply.
The distribution policy of the fund must be disclosed in its offering documents.
For such funds, other requirements under the UT Code (e.g. the requirement under Chapter 4 of the UT Code regarding trustee/custodian) may be waived if applicants are able to demonstrate that there are other comparable measures acceptable to the SFC.
These include Practice Note 21 and Chapter 3A of the Listing Rules, and the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”), in particular, the requirements under paragraph 17
8.08(1)(a) of the Listing Rules.
These include 8.7(o), (p) and (q) of the UT Code, which requires e.g. there being independent and fair valuation of the investments on a regular basis, and certain disclosure regarding valuation frequency, valuation method, identity and qualification of valuation agents, etc.
For further details, please see paragraphs 17 to 19 of the circular.
7.3 of the OP and paragraph 20 of the circular.
See paragraphs 21 to 22 of the circular, and paragraph 5.5 of the Code of Conduct.
5.5 of the UT Code.
Note to 5.1 of the UT Code
The list of recognized jurisdiction schemes is accessible at https://www.sfc.hk/-/media/files/PCIP/List-of-RJS/List-of-RJS_Eng_20210120.pdf?rev=c5739fbf40cc4e3ebb2708b2fcde52ee&hash=FCFC22A95D963A2BBADE5DC5273FA356
This refers to the grant scheme funded by the Hong Kong government and administered by the SFC, which provides subsidies for eligible expenses in relation to the incorporation or re-domiciliation of open-ended fund companies, or the listing of real estate investment trusts. More details about the grant scheme can be accessible at https://www.sfc.hk/en/Regulatory-functions/Products/Grant-Scheme-for-Open-ended-Fund-Companies-and-Real-Estate-Investment-Trusts.
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General
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In assessing the eligibility of an Alternative Fund:
o the dividend policy, where the Alternative Fund should preferably be able to generate regular income streams, depending on its investment strategy, and any distributions must not result in structural decumulation of its capital[4] o the performance of other alternative asset funds managed by the management company o the Alternative Fund’s underlying investments, whether these are sourced or co-invested by firms with relevant experience
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Management company
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In assessing a management company’s acceptability under Chapter 5 of the UT Code:
o the requisite competence, experience and resources on a group-wide basis in managing a public listed vehicle and complying with applicable regulatory requirements, or be able to demonstrate the ability to do so o sizeable assets under management (AUM) of at least HK$780 million invested in relevant alternative assets on a group-wide basis o a good track record of regulatory compliance |
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Listing agent
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An Alternative Fund must appoint a listing agent under Chapter 20 of the Listing Rules, which may be regarded as a sponsor by the SFC if it considers appropriate. If deemed a sponsor, the listing agent must hold the requisite licences and qualifications and must comply with all applicable sponsor obligations[6]. |
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Listing and dealing
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As mentioned above, the Alternative Fund should have procedure(s) and mechanism(s) for it to be widely held. There should be an open market in the units or shares of the Alternative Fund, which normally means the public holds at least 25% of the total units/shares of the Alternative Fund at all times[7]. |
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Investments
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In terms of investments, the SFC generally expects that:
o the value of the Alternative Fund’s investment in units/shares of each underlying fund does not exceed 20% of the Alternative Fund’s NAV o the investment objective and strategy of each underlying fund aligns with those of the Alternative Fund o an underlying fund’s objective may not be investing primarily in other funds Other than the above, the investments requirements under Chapter 7 of the UT Code do not generally apply to Alternative Funds. |
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Valuation and publication of NAV
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An Alternative Fund is expected to:
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Disclosures
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In addition to the usual disclosure requirements applicable to authorised funds, the offering documents of an Alternative Fund should also contain additional disclosures, including e.g. disclosures on valuation, key risks associated with the closed-ended nature of the Alternative Fund, the alternative/illiquid nature of investments, prescribed warning statements, etc[9]. |
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Given the novelty of Alternative Funds as a retail product in Hong Kong, management companies of such funds are expected to carry out extensive investor education before launching their product in Hong Kong[1]. Further, as reminded by the SFC in the circular, Alternative Funds are considered complex products. The distribution of such products is therefore subject to knowledge test relating to complex products, where intermediaries should assess whether clients have knowledge of investing in relevant Alternative Funds or relevant alternative assets prior to effecting a transaction.[11]
Key takeaways
1. Investment restrictions – As the investment restrictions in Chapter 7 of the UT Code do not generally apply to Alternative Funds, a major hurdle for authorisation of Alternative Funds in Hong Kong is removed. This unlocks the potential for investment into a wider array of asset classes and paves the way for greater portfolio diversification for the retail public.
2. Management company eligibility – A management company with a minimum of 5 years of experience in the relevant alternative asset class will qualify for UT Code purposes if it can demonstrate experience in managing a public listed vehicle and meet the AUM requirements on a group-wide basis. While this generally aligns with the relevant requirements under the UT Code[12], this nonetheless provides valuable insights to the SFC’s expectations on how these requirements should be satisfied in the case of alternative fund managers.
However, it is important to note that the UT Code generally requires a management company to be either licensed in Hong Kong or based in a jurisdiction with an SFC-accepted inspection regime – managers based in other jurisdictions will be assessed on a case-by-case basis. [13] The list of acceptable inspection regimes is accessible on the SFC’s website. Given the list is not intended to be exhaustive, it remains to be seen how managers based in jurisdictions that are not expressly recognised would be received and assessed by the SFC.
3. Structuring limits – Alternative Funds are often structured as partnerships in addition to corporate vehicles. However, the UT Code’s authorisation regime is premised on the funds being unit trusts and mutual fund corporations. Alternative Funds structured as partnerships are therefore excluded at this stage.
4. Domicile considerations – While the SFC did not indicate a preference for the domicile of Alternative Funds, it should be noted that the SFC acknowledges certain jurisdictions, in addition to Hong Kong, as recognised jurisdictions[14] with comparable requirements for public funds. Applications for certain schemes established in these jurisdictions will generally be reviewed on the basis that they already comply in substance with the UT Code. Jurisdictions such as Mainland China and Cayman Islands are not currently on the list of recognised jurisdictions and may therefore require additional discussion with the SFC.
In respect of Alternative Funds listed outside Hong Kong, the circular also clarifies that these funds are to be listed and traded on internationally recognised stock exchange open to the public.
What do we anticipate?
Looking ahead, we expect keen interest from fund managers as the regulatory landscape continues to evolve. The latest guidance is a welcome development and presents exciting opportunities – not only for alternative fund managers seeking to expand their distribution channels, but also for investors who are looking for greater access to a diverse range of investment choices. Meaningful synergies with various initiatives, such as the New Capital Investment Entrant Scheme in Hong Kong and outbound investment programs like the Qualified Domestic Institutional Investor scheme in Mainland China, are expected to expand capital raising opportunities and further foster cross-border investment activities.
Interested fund managers should act proactively and begin early considerations of key structural decisions. Prior consultation with the SFC is required. For those looking to establish a listed closed-ended alternative fund, open-ended fund companies – a Hong Kong domiciled structure managed by a locally licensed manager – could be an attractive option, given the SFC’s familiarity with the regime and the availability of reimbursement from government grant scheme for eligible set-up costs[15].
Contact us, anytime
Our team has been actively advising clients on the establishment of various fund structures with difference strategies, ranging from private equity and private credit, to real estate and multi-asset strategies. We also have extensive experience in product issuance, fund authorisation, SFC licence applications and ongoing compliance requirements, as well as cross-border regulatory and compliance issues. Please contact us if we can assist you in any way. We would be delighted to help.
