By A Paris – As the investment industry continues to face a low interest rate environment and the appetite for private capital persists, the Hong Kong asset management industry is well-placed to benefit from the drive to diversify and broaden allocations across Asia. And although some industry commentators point to further progress needed, the legislative changes and supportive environment being fostered represent a huge leap ahead in the jurisdiction’s competitiveness.
Last year saw Hong Kong introduce a number of legislative reforms, namely the introduction of the Limited Partnership Fund (LPF) regime, amendments to the existing Open-Ended Fund Company (OFC) regime and reforms to change the tax treatment of carried interest.
The changes to the OFC regime, which came into effect in September 2020 removed all investment restrictions on these structures and enables Type 1 licensees to act as their custodians. The main thrust of these amendments is to encourage Hong Kong’s growth as a leading financial hub in Asia.
This was further strengthened through a budgetary measure announced in February 2021 which stated asset managers are eligible to subsidies of up to 70 percent of expenses paid to service providers of OFCs set up in or redomiciled to Hong Kong within the next three years.
In the view of Lewis Lu and John Timpany at KPMG: “In light of all of the recent tax developments in fund management, Hong Kong SAR should have a regulatory and taxation fund regime that is compelling and one that entices Asia-focused funds to domicile themselves in Hong Kong SAR.
“The budget announcements further cement Hong Kong SAR’s status as Asia’s leading international private equity and asset management hub and will further attract talent and professional services to the region.”
Mainland China engine
Industry experts expect a significant amount of business to come from managers in mainland China. A report published by the Hong Kong Investment Funds Association (HKIFA) and KPMG says: “The last few years have seen a significant amount of change in mainland China as its financial services industry and capital markets open up to international investors.
“The scrapping of foreign ownership caps on fund management companies this April presents a welcome opportunity for international firms, while plans to launch a ‘GBA Wealth Management Connect’ scheme will enhance the cross-boundary flow of financial products between mainland China and Hong Kong.”
The industry in Hong Kong has been on a growth path. According to statistics from the Securities & Futures Commission of Hong Kong (SFC) asset management in the jurisdiction registered strong growth in 2019, with a 20 percent year-on-year increase in AUM to HKD28,769 billion and net fund inflows of HKD1,668 billion. This rise took place before the regulatory changes, therefore the outlook going forward is brighter.
The GBA scheme is expected to be part of this future. “Connecting with Hong Kong, an established global financial centre, allows the region [GBA] to immediately tap into its world-class talent pool, sound legal framework and international best practices to help accelerate China’s plans to liberalise its financial markets,” observes Andrew Lo, Invesco’s Senior Managing Director and Chief Executive Officer Asia-Pacific, in a report called ‘China asset management at an inflection point’.
In the same report, Cheah Cheng Hye, Co-Chairman and Co-Chief Investment Officer, Value Partners and James Fok Strategic Adviser, London Metal Exchange (LME) say Hong Kong’s role as a bridge between China and international markets looks set to endure.
The HKIFA-KPMG survey finds respondents in Hong Kong agree that mainland China remains a key growth market for the industry. A significant percentage of survey participants (79 percent) expect their total AUM originating from China to grow by more than 10 percent in the next five years.
Hong Kong catching up on ESG
Sustainability is another topic addressed within the association’s study. “A key development in the asset management industry is the increasing demands from investors that asset managers integrate ESG into their investment decisions and offer more sustainability-related products. Specifically, investors – both institutional and retail – are increasingly expecting their managers to target positive and measurable ESG outcomes, while generating positive financial returns,” the study outlines.
Although Europe has largely been leading the charge on sustainability, Asia is coming up the ranks. The HKIFA-KPMG survey reveals around a quarter expect more than 25 percent of their AUM to be invested in ESG products by 2025. A further 16 percent believe their AUM levels here will be between 16 percent and 30 percent.
In December, the HKMA and the SFC became members of the European Commission’s (EC) International Platform on Sustainable Finance (IPSF) which encourages private capital to make environmentally sustainable investments. The regulators also actively participate in the Network of Central Banks and Supervisors for Greening the Financial System and the United Nations Sustainable Stock Exchanges Initiative Advisory Group.
The Alternative Investment Management Association recognises the efforts Hong Kong regulators are making in this regard: “To enhance the competitiveness of the city’s ESG investment market, Hong Kong regulators have been gradually introducing more disclosure and reporting requirements in recent years.” n