Andrew Procter, executive director at SFC, says the regulator will organize a committee to review the sweep of Hong Kong’s asset management industry, the most radical feature of which is to authorize the selling of hedge funds to a mass audience. At present, such instruments are only sold privately to high-net worth or institutional clients -- behind closed doors and beyond regulatory sight.
“We want Hong Kong to be the premier and desired fund management centre for Asia, and to satisfy both fund managers and their potential clients,” he says.
SFC recognizes a rising demand for such products and acknowledges its current rules are too restrictive. “We have a lot of sympathy with the view that alternative investments should be available to the retail customer in Hong Kong,” he says. At the same time, he notes many investors do not understand how such vehicles work and SFC is obliged to balance its duty to protect investors with its desire to improve their access to alternative investments.
Its goal is to work with the hedge fund industry to segment the market and identify which investors are sophisticated and have enough cash to look after themselves. Part of this will include a minimum investment requirement. SFC is not interested in authorizing hedge funds on the basis of their specific characteristics such as asset allocation or degree of leverage, but rather on how well potential customers can understand the risk. It will be incumbent upon fund managers and distributors to assess their clients’ sophistication and general financial circumstances.
Hedge fund managers in Hong Kong hailed the move. One says, “It is a positive move because it means the regulatory body here is willing to learn about what people like us do.”
The hedge fund industry often feels discriminated against in Hong Kong. Ever since the government’s 1998 intervention in the stock market to head off currency speculators trying to break the Hong Kong dollar’s peg to the US dollar, the government has frowned upon hedge funds. Last year, it made naked short-selling a jailable offence. “The industry does not want to be picked on or feel that it is treated inconsistently with traditional funds,” says one hedge fund manager.
Hedge fund managers say the government’s stance has mellowed, partly due to time and partly because many of the big global hedge funds have since gone bust. Nonetheless, Procter’s announcement still leaves some managers wary. They point out that globally, almost all hedge funds are sold privately so that opening them up to more consumers is not significant. Rather, they allege the regulators continue to throw the book at hedge funds that violate the naked short-selling rules -- not out of criminal intent but because of simple mechanical error. “Punishments have not been commensurate with the misdeed,” argues one manager.
The most likely beneficiaries of opening hedge funds to a retail customer base will be either large, established hedge funds that have a track record they can show to regulators; and traditional long-only equities houses interested in alternative investments which can leverage off their safe reputations to break into the hedge fund business. Small boutiques will not find the retail market attainable, says one boutique manager.
In addition to hedge funds, Procter says SFC wants to facilitate the listing of funds that track indices. It will also simplify unit trust financial statements and the code regulating the unit-trust industry. “We recognize that, like in other jurisdictions, investors do not read the prospectus. But they need to be aware of risks.” He wants to repackage the sale of unit trusts so that these risks are made clear and presented up-front, and at the same time ensure the administration is made easier for fund managers.
