Hong Kong is seeing a sharp jump in the number of asset management licences handed out, mostly driven by applications by mainland Chinese firms, but there are concerns both about the source of these companies’ investor capital and their potential impact on the local stock market.
As of the end of October the Securities and Futures Commission (SFC) had awarded 160 asset management (type 9) licences for the year-to-date period, with 25 of those coming in October alone. That already nearly matches the 165 approvals seen during the whole of 2016 and follows 134 in 2015.
Most of the new licensees are small China long/short equity managers with $20 million to $50 million in assets under management, said Josephine Chung, founder and director of CompliancePlus, a Hong Kong-based consultancy. And there are many more licences still pending approval, she told AsianInvestor.
The new managers are setting up to trade Greater China shares through the Stock Connect trading link, Chung added. “They’re looking to use Hong Kong as an offshore investment hub and the environment is very bullish now.”
Since January 2016 mainland stocks have risen some 60% and Hong Kong shares have gained about 50%, though both have seen a pullback in the past two weeks.
However, mainland hedge funds face big challenges to expand offshore, as AsianInvestor has previously reported, with only one in five said to survive.
There are also a massive number of applications for the SFC to deal with, said Philippa Allen, chief executive of ComplianceAsia, a consultancy based in Hong Kong. That is one reason why individual approvals have taken a relatively long time, she told AsianInvestor, but the backlog is also down the regulator's huge overall workload.
Allen said the volume of work was largely down to to the market watchdog’s new manager-in-charge (MIC) regime, which was fully implemented on October 17. Under this regime, MICs of overall management oversight and key business line functions are expected to be responsible officers (ROs). The SFC said in October that it was handling RO applications from about 500 MICs of these two core functions.
Many of the applications are from small Chinese long/short equity managers, Allen agreed, but there are some that invest in specific sectors with highly concentrated positions and others with a mostly private equity-type strategy, with most of their holdings in illiquid assets and a small allocation to liquid securities.
They are primarily running money for high-net-worth individuals from the Chinese mainland, she added.
Sourcing and structure
Some industry observers told AsianInvestor there are question marks over the source of such capital and worries about the potential impact it might be having on the stock market in Hong Kong. The regulator has intimated that it has concerns about investors from outside Hong Kong manipulating the local market, Allen said.
Even before the Stock Connect scheme launched in November 2014, market observers had expressed fears that the link would make it easier for mainland investors to front-run trades in Hong Kong’s stock market. Front-running—or ‘rat trading’, as it is known in China, where brokers trade on the basis of non-public knowledge of clients' planned orders—is more prevalent on the mainland than in Hong Kong.
A further question mark over Chinese hedge funds is the different way they are structured compared with their Western peers. Chinese financial firms can have various siloes, in that a bank might have a fund management company and its broker dealer and trust divisions can also have asset management companies, Allen said.
“These Chinese firms seem to want to replicate such setups in Hong Kong,” she noted. “So instead of setting up one asset management company for ABC Bank or or ABC Trust Company, they set up a few, but they’re all very siloed.
“I don’t know if it’s because that’s how they do business in China or for some other reason," said Allen, 'but it is not the way a Western firm would approach setting up in Hong Kong.”