It will be possible to sell Hong Kong-domiciled funds into the European Union under the Alternative Investment Fund Managers Directive (AIFMD), a significant opportunity that appears not to be widely recognised.
This represents another incentive for foreign and local fund houses to domicile funds in Hong Kong. In addition to being able to sell locally domiciled funds into China via the highly anticipated mutual recognition scheme, asset managers will also theoretically also be able to tap into the 28 EU markets.
Yet industry participants seem largely unaware that marketing HK-domiciled funds into Europe will be possible once AIFMD comes into force, say sources. The directive is due to take effect in 2015, though a date has not yet been finalised.
Under AIFMD, non-EU alternative fund managers may acquire a passport to sell the funds to 28 markets in Europe by 2015. Hong Kong’s Securities and Futures Commission signed a memorandum of understanding in July with European regulators to supervise managers of alternative funds and related service providers.
This will mean packaging a retail strategy as an alternative investment fund, and managers will be able to market to institutions, notes Nicolas Papavoine, Hong Kong-based lawyer at Allen & Overy.
European private banks will only be able to access these products under discretionary mandates, says Stephane Karolczuk, Hong Kong head at Luxembourg law firm Arendt and Medernach.
Retail investors may also be able to access such products, if individual member states were to allow for it. Regulators may also put a threshold such as €100,000 or other types of restrictions, adds Karolczuk.
However, it could be a while before Hong Kong-domiciled funds become popular in Europe. “In Europe, the Ucits is by far the most common vehicle for mutual funds, so it would probably take some time for investors to get accustomed to a Hong Kong vehicle,” says Papavoine.
There are also other issues for managers of HK-domiciled funds. To comply with AIFMD, firms must provide remuneration policies, which many may be hesitant to disclose.
Meanwhile, Papavoine has continued to receive requests from Asian clients wanting to distribute Luxembourg Ucits funds in Europe. He has also seen an uptick in inquiries for firms seeking to re-domicile Cayman Island funds in Hong Kong, as well as European managers looking to set up a presence in the city.
That said, the development of Asia passporting schemes has brought Ucits’ future into question – some CEOs in the region believe they could eventually become superfluous. And the fact that Hong Kong-domiciled funds may eventually be passported into Europe could be another challenge for Ucits.
Certainly, Asian managers will first and foremost look at schemes in the region, says a lawyer who asked not to be named. “In Asia, Ucits will lose traction.”
Some downplay the impact Hong Kong funds will have, noting that European funds and Ucits strategies are widely recognised and already have a strong foothold. European retail funds are sold across multiple jurisdictions beyond the 28 EU countries, including Asia, the Middle East and Latin America.
For instance, executives from firms such as Principal Global Investors and UBS Global Asset Management don’t see Ucits’ appeal waning overnight.