Growth of hedge fund industry in Hong Kong a priority
The SFC vows to work closely with the industry and other regulators.
Hong KongÆs hedge fund industry is gaining from the increasing popularity of China among portfolio investors worldwide, and the Securities & Futures Commission understands it has a role in helping cultivate this connection.
China is a focus point for the hedge fund industry and international fund managers are using Hong Kong as a platform to tap into that market, notes SFC CEO Martin Wheatley.
ôThe Chinese economy is growing fast. While there is abundant capital and strong liquidity driving the mainland markets, international investors continue to seek out value,ö says Wheatley. ôHong KongÆs international characteristics and close connection with the mainland enable it to serve as a bridge between the mainland and the rest of the world.ö
Wheatley made the remarks at the Hong Kong: Hedge Fund Hub of Asia û 2007 conference, hosted by the Hong Kong chapter of the Alternative Investment Management Association (Aima).
Citing industry sources, Wheatley says assets under management of hedge funds with China strategies grew significantly to $10.6 billion in end-June from $6.5 billion six months earlier. Hong Kong has been the preferred location of fund managers with Asia ex-Japan strategies, especially China strategies, he says.
He notes that assets under management of hedge fund managers in Hong Kong increased from $22.6 billion as of June 2006 to $28.3 billion as of June 2007, representing an increase of 25% in just one year.
ôWe will continue to work closely with the industry and other regulators to maintain Hong Kong as a leading hedge fund centre in Asia, providing a balanced and market-friendly regulatory environment which attracts both capital and quality market players. This remains a priority for us,ö he says.
Wheatley notes that the most often cited reasons by global hedge fund players that have set up businesses in Hong Kong include the territoryÆs geographic location in Asia and in relation to Japan, Europe and North America; access to greater levels of capital; access to superior professional support; the availability of superior infrastructure; and of course the territoryÆs proximity to China.
And Wheatley underscores why being ChinaÆs neighbor is a big deal. China is currently the fastest growing economy in East Asia and the world. Between 1978 and 2006, Chinese real GDP grew from $180 billion to $2.68 trillion (based on 2006 prices). It is the fourth largest economy in the world after the US ($13 trillion), Japan ($4.4 trillion) and Germany ($2.9 trillion). It is expected that China will surpass Germany and become the third largest economy shortly.
As of end-September, there were 1,210 companies listed in the Hong Kong stock market, of which 19% were mainland companies. The market capitalisation of these mainland companies accounted for 53% of the total market capitalisation of the entire Hong Kong stock market. For the 12-month period ended 30 September, 48% of the total market turnover was accounted for by these mainland companies.
Since 2000, the value of Hang Seng China Enterprise Index has registered a significant increase by more than eight times. The largest mainland initial public offering, ICBC, was conducted in Hong Kong in 2006.
ôWe believe that Hong Kong will continue to serve as a major fund raising centre for mainland companies, and more overseas investors will be attracted to participate in the Hong Kong stock market,ö Wheatley says.
The opening up of the mainland market through the qualified foreign institutional investor (QFII) scheme also presents an immense opportunity for the industry. To date, a total QFII quota of $10 billion has been granted to foreign institutional investors, which may directly invest in the Mainland securities market, Wheatley notes. (China's State Administration of Foreign Exchange has recently expanded the QFII program quota from $10 billion to $30 billion.)
ôWith a robust financial infrastructure and a large pool of professionals familiar with China æknow howÆ, Hong Kong continues to be an attractive platform for international players to invest in the mainland,ö Wheatley says.
Meanwhile, under the qualified domestic institutional investor (QDII) scheme, approved banks, fund management companies or securities firms and insurance companies in the mainland are allowed to invest in overseas capital markets. QDII funds flow to overseas markets through both equity investments and a variety of fund products. Since the implementation of the scheme, a lot of bank QDII products have been developed, and many of them are linked to or invest in Hong Kong stocks and SFC-authorised funds.
For just banks and fund management companies alone, a total QDII quota of over $36 billion has been granted by the China authority as of the end of November. Wheatley estimates the utilisation rate of the QDII quota at around 40-50%. The investment potential in this area, therefore, remains strong, he notes.
Under the Cepa IV, for the first time, asset managers from the mainland are permitted to set up subsidiaries in Hong Kong. China and Hong Kong reached a further understanding regarding the Closer Economic Partnership Arrangement last year to further liberalise PRC market access for qualified Hong Kong service suppliers, under a supplement known as Cepa IV.
ôThe arrival of these mainland professionals will make Hong Kong even stronger as an international asset management centre, with experienced managers from all major markets,ö Wheatley says. ôThe increased participation of mainland fund managers will not only bring in China expertise including their knowledge about the China market and investor demands, it will also introduce connections and capital.ö
Hong KongÆs effort in implementing a business and investor-friendly tax system has also further fostered the territoryÆs position as a fund management centre, Wheatley says. From March 2006 onwards, offshore funds are exempted from tax for profits derived from specified transactions in Hong Kong. Furthermore, the abolition of estate duty, which has been effective since February 2006, encourages people, including local and overseas investors, to hold assets in Hong Kong. ôMore capital will be attracted to come here as a result.ö
Overall, Hong Kong is well-placed to capture all these opportunities, Wheatley notes. ôTo further enhance our competitiveness, we are also committed to providing a balanced and market-friendly regulatory environment, bearing in mind investorsÆ interests.ö
Wheatley notes that the SFC clearly understands that its roles includes not only regulation and enforcement, but also investor education and market facilitation, two roles that it sees as equally important.
The SFC encourages potential hedge funds licence applicants to meet with it before submitting their licence applications, Wheatley says. ôBy engaging in this dialogue, we find that we simplify the licencing process for applicants and that we tend to receive applications from them which fulfill all of our requirements. This, in turn, simplifies and accelerates our
licencing process.ö
During the first three quarters of this year, 37 hedge fund licences were approved, exceeding last yearÆs 29. Since June, the SFC has noticed increasing numbers of overseas hedge fund managers visiting it to discuss their business plans and the licencing requirements, and its experience has been that reputable and experienced US and UK hedge fund managers receive approval within three to four weeks after submitting their applications.
There are now 14 retail hedge funds authorised by the SFC, with a total net asset value of around $1.67 billion as of end-September.
China is a focus point for the hedge fund industry and international fund managers are using Hong Kong as a platform to tap into that market, notes SFC CEO Martin Wheatley.
ôThe Chinese economy is growing fast. While there is abundant capital and strong liquidity driving the mainland markets, international investors continue to seek out value,ö says Wheatley. ôHong KongÆs international characteristics and close connection with the mainland enable it to serve as a bridge between the mainland and the rest of the world.ö
Wheatley made the remarks at the Hong Kong: Hedge Fund Hub of Asia û 2007 conference, hosted by the Hong Kong chapter of the Alternative Investment Management Association (Aima).
Citing industry sources, Wheatley says assets under management of hedge funds with China strategies grew significantly to $10.6 billion in end-June from $6.5 billion six months earlier. Hong Kong has been the preferred location of fund managers with Asia ex-Japan strategies, especially China strategies, he says.
He notes that assets under management of hedge fund managers in Hong Kong increased from $22.6 billion as of June 2006 to $28.3 billion as of June 2007, representing an increase of 25% in just one year.
ôWe will continue to work closely with the industry and other regulators to maintain Hong Kong as a leading hedge fund centre in Asia, providing a balanced and market-friendly regulatory environment which attracts both capital and quality market players. This remains a priority for us,ö he says.
Wheatley notes that the most often cited reasons by global hedge fund players that have set up businesses in Hong Kong include the territoryÆs geographic location in Asia and in relation to Japan, Europe and North America; access to greater levels of capital; access to superior professional support; the availability of superior infrastructure; and of course the territoryÆs proximity to China.
And Wheatley underscores why being ChinaÆs neighbor is a big deal. China is currently the fastest growing economy in East Asia and the world. Between 1978 and 2006, Chinese real GDP grew from $180 billion to $2.68 trillion (based on 2006 prices). It is the fourth largest economy in the world after the US ($13 trillion), Japan ($4.4 trillion) and Germany ($2.9 trillion). It is expected that China will surpass Germany and become the third largest economy shortly.
As of end-September, there were 1,210 companies listed in the Hong Kong stock market, of which 19% were mainland companies. The market capitalisation of these mainland companies accounted for 53% of the total market capitalisation of the entire Hong Kong stock market. For the 12-month period ended 30 September, 48% of the total market turnover was accounted for by these mainland companies.
Since 2000, the value of Hang Seng China Enterprise Index has registered a significant increase by more than eight times. The largest mainland initial public offering, ICBC, was conducted in Hong Kong in 2006.
ôWe believe that Hong Kong will continue to serve as a major fund raising centre for mainland companies, and more overseas investors will be attracted to participate in the Hong Kong stock market,ö Wheatley says.
The opening up of the mainland market through the qualified foreign institutional investor (QFII) scheme also presents an immense opportunity for the industry. To date, a total QFII quota of $10 billion has been granted to foreign institutional investors, which may directly invest in the Mainland securities market, Wheatley notes. (China's State Administration of Foreign Exchange has recently expanded the QFII program quota from $10 billion to $30 billion.)
ôWith a robust financial infrastructure and a large pool of professionals familiar with China æknow howÆ, Hong Kong continues to be an attractive platform for international players to invest in the mainland,ö Wheatley says.
Meanwhile, under the qualified domestic institutional investor (QDII) scheme, approved banks, fund management companies or securities firms and insurance companies in the mainland are allowed to invest in overseas capital markets. QDII funds flow to overseas markets through both equity investments and a variety of fund products. Since the implementation of the scheme, a lot of bank QDII products have been developed, and many of them are linked to or invest in Hong Kong stocks and SFC-authorised funds.
For just banks and fund management companies alone, a total QDII quota of over $36 billion has been granted by the China authority as of the end of November. Wheatley estimates the utilisation rate of the QDII quota at around 40-50%. The investment potential in this area, therefore, remains strong, he notes.
Under the Cepa IV, for the first time, asset managers from the mainland are permitted to set up subsidiaries in Hong Kong. China and Hong Kong reached a further understanding regarding the Closer Economic Partnership Arrangement last year to further liberalise PRC market access for qualified Hong Kong service suppliers, under a supplement known as Cepa IV.
ôThe arrival of these mainland professionals will make Hong Kong even stronger as an international asset management centre, with experienced managers from all major markets,ö Wheatley says. ôThe increased participation of mainland fund managers will not only bring in China expertise including their knowledge about the China market and investor demands, it will also introduce connections and capital.ö
Hong KongÆs effort in implementing a business and investor-friendly tax system has also further fostered the territoryÆs position as a fund management centre, Wheatley says. From March 2006 onwards, offshore funds are exempted from tax for profits derived from specified transactions in Hong Kong. Furthermore, the abolition of estate duty, which has been effective since February 2006, encourages people, including local and overseas investors, to hold assets in Hong Kong. ôMore capital will be attracted to come here as a result.ö
Overall, Hong Kong is well-placed to capture all these opportunities, Wheatley notes. ôTo further enhance our competitiveness, we are also committed to providing a balanced and market-friendly regulatory environment, bearing in mind investorsÆ interests.ö
Wheatley notes that the SFC clearly understands that its roles includes not only regulation and enforcement, but also investor education and market facilitation, two roles that it sees as equally important.
The SFC encourages potential hedge funds licence applicants to meet with it before submitting their licence applications, Wheatley says. ôBy engaging in this dialogue, we find that we simplify the licencing process for applicants and that we tend to receive applications from them which fulfill all of our requirements. This, in turn, simplifies and accelerates our
licencing process.ö
During the first three quarters of this year, 37 hedge fund licences were approved, exceeding last yearÆs 29. Since June, the SFC has noticed increasing numbers of overseas hedge fund managers visiting it to discuss their business plans and the licencing requirements, and its experience has been that reputable and experienced US and UK hedge fund managers receive approval within three to four weeks after submitting their applications.
There are now 14 retail hedge funds authorised by the SFC, with a total net asset value of around $1.67 billion as of end-September.
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