Fund managers planning to use the Shanghai-Hong Kong Stock Connect want to observe how the trading link operates first, saying clarification is needed on issues such as quota limits and a potential capital gains tax levy.

Manuel Schlabbers, fund manager at SinoPac Asset Management Asia, said the scheme offers mispricing opportunities for the Asian value arbitrage fund that he runs there, but confirmed that he would not be participating from the scheme's start next Monday.

Likewise, Pangu Capital, a Hong Kong-based hedge fund firm focused on China equities, will trade the Connect, but plans to take time to observe its operation.

Still, foreign hedge fund managers will be keen to use the link because it is a cheaper way or accessing Chinese stocks than borrowing QFII or RQFII quota or using P-notes, said one Chinese fund executive. And such firms will likely be among the first to participate in Stock Connect because traditional managers are likely to take more time to assess the risks involved.

JP Morgan Asset Management will wait for clarification on capital gains tax before it starts trading, said fund manager Lillian Leung. Charles Li, chief executive of Hong Kong exchange, has said this clarity will come this week.

“The Connect will be an additional channel for us to buy A-shares, but it will not be the core vehicle,” she added. The firm has used up its $525 million of QFII quota but not all of its Rmb1 billion ($162 million) of RQFII quota.

It is a lack of clarity about the quota limit under Stock Connect that is giving exchange-traded and passive fund managers reason to pause. (A daily quota cap has been set on northbound trades (those of A-shares via Hong Kong) of Rmb10.5 billion.)

Indexers need to have certainty about what they can buy under the quota, said Lora Yip, Hong Kong head of legal and compliance at Vanguard Investments. Fund executives point out that this will only be clear some time after the scheme has launched.

Mainland fund managers also plan to wait and see how the scheme pans out before making a move. They will have to wait for regulatory approval as to whether they can launch funds based on Stock Connect, said Hou Mingfu, deputy general manager at China International Fund Management, the Shanghai-based joint venture of JP Morgan AM and Shanghai International Trust Co.

Chinese retail investors will be keen to use the link, particularly given Hong Kong’s T+0 settlement mechanism, said Lai Zhongli, portfolio manager at Shanghai-based China Universal Asset Management. But only retail investors with a balance in their brokerage account of at least Rmb500,000 are allowed to participate, which only accounts for 5% of mainland domestic investors.

Taiwanese fund managers are excited about Stock Connect, since they are still awaiting go-live of the RQFII scheme in Taipei. China handed Taiwan Rmb100 billion in RQFII quota in January 2013, but the scheme is still pending following protests in Taipei in March this year related to the Cross-Strait Service Trade Agreement.

China equity mutual funds under the QFII scheme in Taiwan can now boost to 100% their holding of A-shares through the Connect now, said Julian Liu, president and CEO of Taipei-based Yuanta Securities Investment Trust Company. The firm plans to launch a new product that will buy A-shares through the Connect scheme.