Serious differences are emerging between Hong Kong's markets
watchdog and hedge fund managers queuing up to have their
products authorised for retail sale.
After winning plaudits for breaking new ground in international
financial markets by allowing hedge funds to be offered to
the public, the Securities and Futures Commission is now being
criticised for putting obstacles in the way of new players.
Disgruntled managers are preparing to put their grievances
in front of the Commission after behind-the-scenes meetings
with top officials have failed to break the logjam.
The campaign for change is expected to be coordinated by
the Alternative Investment Managers Association, rather than
the Hong Kong Investment Funds Association.
Frustrated fund managers, who have constructed funds which
they believed would be inside the guidelines issued by the
SFC last year, now point out that only five managers have
had products approved - ten months on.
These have come from local players JF Funds, with two funds,
while HSBC Asset Managers has launched a single fund of hedge
The latest additions, approved in March, were from Invesco
and the Permal group.
While no formal documents outlining the complaints of the
funds has yet emerged from AIMA or its advisers, insiders
reckon that the list will cover several pages. Top item is
likely to be the interpretation of the rules on fund of hedge
fund products, which were expected to spearhead the retail
During the consultation process, which led up to the eventual
agreement to authorise hedge funds for retail sales in Hong
Kong, funds of hedge funds were presented as the low-risk
alternative to single-strategy products. To reflect the differential,
entry levels of the two classes were pitched at different
amounts; funds of hedge funds have a minimum US$10,000 subscription
limit, while single-strategy hedge funds have a US$50,000
At the time the guidelines were introduced, the industry
expected that the simple difference in entry level would provide
the safeguards that the SFC sought. Now, say critics, funds
of hedge funds are being subject to the stricter criteria
that apply to single-strategy products.
"With the exception of the difference in minimum investments,
the SFC has made virtually no differential between requirements
for single-strategy hedge funds and funds of hedge funds,"
complained one manager.
" The funds of funds have to meet the same high levels
of compliance as single-strategy funds, and this is preventing
many of them from achieving the authorisation."
The industry agrees that the SFC had a duty to be watchful.
The authorisation of retail funds is still seen as a bold
move, and one that the rest of the world is watching with
Yet, goes the complaint, the present interpretation of rules
on funds of hedge funds threatens to stifle their development.
When the green light was given for retail hedge funds last
year it had been expected that very quickly there would be
up to a score of choices for investors, rather than a handful.
Another major sticking-point is the insistence that fund
of hedge funds managers have to meet the same standards of
experience and manpower backup as single-strategy funds. The
SFC is anxious that a senior departure will not jeopardise,
or substantially alter, the strategy of a fund.
"They (the SFC) very reasonably have concerns regarding
single-strategy funds," admitted one manager. "As
soon as you get a change it makes it difficult to continue
the management. However, if you are running a fund of hedge
funds, a product diversified among 15 to 50 different funds
to give lower risks, you don't have to worry so much about
the overseeing manager of those other managers walking."
Outsourcing by one fund to a more established management
group with the required five years of experience of running
the same type of funds should also be a simple process, but
has proved to be another stumbling block, claim critics.
"If you outsource management, which is what a number
of long-only funds do, you are likely to find that you have
to show that you have your own five years experience in management
- so what's the point of outsourcing? If you don't have the
five years, you fail the test of being authorised," explained
Domicile is another big fence which many fund managers have
found they can't jump. If their proposed fund advisor is domiciled
in a jurisdiction such as Bermuda or the Cayman Islands, which
the SFC regards as not being an Acceptable Inspection Regime
(AIR), authorisation becomes a big problem.
"Probably 70 per cent of all hedge funds in existence
will have no chance of qualifying under the SFC guidelines,
because the ultimate fund advisor will be in a non-acceptable
jurisdiction," estimated one fund administrator.
This basically limits potential advisors to those who are
regulated by the Securities and Exchange Commission in the
US, the UK's Financial Services Agency and the Commission
des Opérations de Bourse in Paris.
"Refusing to allow established management groups that
have a strong presence in the local retail market to use the
advisors of their choice, is not treating them like grown-ups,"
complained one frustrated manager.
Instead, it suggests that the local entity be made responsible
for the funds' integrity, with any transgressions attracting
Outsiders might find the apparent obstacles to authorisation
of retail hedge funds now emerging in Hong Kong surprising,
given the long and detailed consultation period that preceded
the decision to go ahead.
"Part of the problem is that the SFC has taken it upon
itself to adopt a much more stringent approach than the words
in the guidelines would imply," explained an international
advisor, who also admitted that the industry may not have
fully understood all the implications of the rules.
The SFC appears genuinely surprised at the criticism it
now faces, and the possibility of any misunderstanding of
Said an SFC spokesperson, "The industry knows very
well that the commission has been trying its best to raise
transparency and explain our regulatory philosophy and arguments.
"We have given lectures, hosted seminars, had one-on-one
meetings. It is possible that funds might not get approval,
or not as quickly as they would like, but it is not a question
of being slow in processing, but in the general ability of
funds to comply with requirements."
The reply from industry insiders is that more flexibility
is needed if retail hedge funds are to take off in Hong Kong.
Whatever the arguments, retail investors hoping to have had
a chance to hedge their investments, find themselves with
a very limited range of options.