Common Questions and Answers About Our Capabilities
How We Can Help in Hedge Fund Formation
We set out below some of the common concerns our clients encounter in the set-up of hedge funds in Hong Kong and how we can help address those concerns.
We have a solid understanding of the licensing requirements under the SFO. We assess your proposed business activities and advise on whether you need an SFC license and if so, whether you need an SFC license for Type 9 (asset management) or an SFC license for Type 1 (dealing in securities).
We have advised hedge fund management groups on the possible availability of the intra-group exemption from Type 9 licensing and the possible use of the professional investors exemption (“PI Exemption”) from Type 1 licensing.
In addition, we can help assess whether the active marketing provisions of the SFO, which extend the SFC licensing requirements to certain conduct and activities outside Hong Kong, may apply to you if you are targeting Hong Kong investors.
We have extensive experience assisting hedge fund managers in applying for SFC licenses. Our clients benefit from our vast knowledge of the SFC licensing process accumulated over the years.
We have a thorough understanding of SFC licensing requirements, such as the “fit and proper” and competence tests. We are familiar with the various factors which the SFC will have regard to when assessing your SFC license application.
We evaluate your individual background and your proposed business activities to help you prepare an application to meet all the applicable regulatory requirements and improve your chance of success of being approved, whether as a licensed representative or as a responsible officer.
We actively help you pre-empt any potential concerns which the SFC may have and address any issues before they arise to ensure the greatest chance of a smooth and quick grant of the SFC license.
We help you think through how the hedge fund management group should be governed if there are 2 or more key partners or stakeholders in the group. We guide you through the decisions which you may need to make to avoid future disputes and to protect your interests in the event that your relationship with partners or key stakeholders deteriorates. We can review or prepare investment agreements by which seed investors take a stake in the management group or by which you and one or more partners agree to work together to launch the fund.
We have extensive experience advising on the types of issues which you may face in these situations including as regards voting rights, the distribution of profits, deadlock in decision making, restrictive covenants and the “ownership” of investors in the event of a subsequent breakup of the partnership.
We evaluate your capital raising, liability management and tax planning objectives and consider your proposed administrative infrastructure to help you decide what type of vehicle is most appropriate for your hedge fund and in which jurisdiction that vehicle should be registered.
We can advise you on both the effectiveness and limitations of Cayman SPC structures in Hong Kong, as well as on potential challenges you may face in Hong Kong using Cayman fund structures, particularly in respect of anti-money laundering and the recent economic substance requirements.
We can guide you through the possibility of using a Hong Kong OFC structure and advise you on the potential benefits in terms of costs and regulatory compliance obligations.
We can assess the need for feeder fund structures based upon the jurisdictions where you expect to raise capital.
We can work with you to identify whether there would be any commercial need for you to establish a management vehicle outside of Hong Kong and to identify any opportunities to minimize Hong Kong tax liabilities on the hedge fund management groups. We can provide you with background information on changes in the Cayman Islands requiring hedge fund managers to meet economic substance tests to register in the Cayman Islands.
We have extensive background advising on the provisions of the Inland Revenue Ordinance (“IRO”) governing theTaxation of Hedge Funds, including the offshore funds exemption and the new private funds exemption. We held discussions with the Inland Revenue Department (“IRD”) with a view to shaping the IRD’s position in the latter regard.
We can assess your fund’s structure and activities and help you determine whether it may be at risk of being subject to Hong Kong profits tax. If so, we can help you structure your affairs to meet conditions for exemptive relief.
Q7: How can I raise capital in Hong Kong? What laws or regulations govern capital raising in Hong Kong? Do I need SFC authorization to raise capital in Hong Kong? Do I need to register my fund to offer it in Hong Kong? Are there exemptions from SFC authorization? Can I use the professional investors exemption to sell my fund in Hong Kong?
We advise regularly on both the prospectus requirements under the Companies (Winding-up and Miscellaneous Provisions) Ordinance (“CWUMPO”) as well as the SFC authorization requirements for investment offers under the SFO. We can help you understand when you will be subject to Hong Kong regulatory requirements governing your capital raising and when and how you may be exempt.
We advise portfolio managers looking to set up a hedge fund in Hong Kong on visa requirements under the Immigration Ordinance (“IO”). We can help you determine whether you need a visa and if so, what type of visa is most appropriate. If you have dependents, we can assess whether your dependents need a visa and if so, what type of visa would be most appropriate for them.
We can help you prepare the visa application and advise you on how to meet the expectations of the Immigration Department for that type of visa so as to ensure the greatest chance of a smooth and quick visa process.
How We Can Help Following the Formation of a Hedge Fund
After a hedge fund is established, we continue to work with the fund and the fund manager to ensure ongoing compliance with regulatory requirements and obligations. In this regard, we set out below some common issues our clients encounter post set-up and how we can help address those issues.
Q1: How can I ensure that I comply with SFC regulatory requirements on an ongoing basis? What are the ongoing obligations of a hedge fund and a fund manager in Hong Kong? Are there any regulatory reporting or notification requirements? What steps do I need to take to keep up with the regulatory requirements? How often should I review my fund documentation to ensure ongoing compliance?
We advise hedge funds and fund managers on their ongoing statutory obligations and on meeting the various standards and expectations of the SFC including those set out under the Code of Conduct for Persons Licensed by or Registered with the SFC (“SFC Code of Conduct") and the Fund Manager Code of Conduct ("FMCC”).
We help hedge fund managers assess whether they are likely to be regarded by the SFC as being responsible for the overall operation of the fund (“ROOF”). For managers who are ROOF, we provide guidance on compliance, including in respect of their own internal control procedures, operations manuals and compliance manuals as well in respect of content of fund documentation including PPMs and annual reports.
We conduct ad hoc compliance reviews to identify possible regulatory non-compliance or possible internal control weaknesses or deficiencies, either on a general basis or in respect of specific areas of possible concern (e.g. anti-money laundering (“AML”), suitability obligations, compliance with professional investor exemptions).
We have extensive experience advising hedge fund managers on reporting requirements including:
disclosure of interest requirements under Part 15 of the SFO, including substantial shareholder notifications for persons having an interest in a Hong Kong listed company's voting shares above a certain threshold
short position reporting requirements under the Securities and Futures (Short Position Reporting) Rules (“Short Position Rules”)
derivative position reporting requirements under the Securities and Futures (Contracts Limits and Reportable Positions) Rules (“Contracts Limit Rules”)
short selling reporting requirements under the SFO and requirements under the Securities and Futures (Short Selling and Securities Borrowing and Lending (Miscellaneous) Rules, including stock lending record keeping requirements and documentary assurance requirements in respect of securities borrowing and lending agreements
We help hedge fund managers trading the Hong Kong markets understand when there is actual non-compliance and if so, we help them address such non-compliance. In this latter regard, we understand SFC standards and expectations in addressing possible breaches.
We advise hedge fund managers active in the Hong Kong markets on the scope of provisions (both civil and criminal) prohibiting market misconduct under sections 274 to 278 and 295 to 299 of the SFO, including in respect of false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions and stock market manipulation, as well as the anti-fraud provisions in section 300 of the SFO which are modelled on Rule 10b-5 of U.S. securities legislation. We assess the specific proposed trading strategy or trades with a view to determining how these market misconduct provisions may apply and we provide advice to hedge fund managers on ensuring that proposed trading strategies and trades do in fact comply.
We have advised a number of hedge funds operations and trading and portfolio management operations on information that may fall within the scope of “inside information”, and on transactions which may constitute “insider dealing” under the insider dealing provisions of sections 270 and 291 of the SFO. We help explore defences and exemptions which may be available to clients. We offer advice on how to handle price sensitive information, taking into account the statutory requirements, including the anti-fraud provisions in section 300 of the SFO, the nature and scope of client’s fiduciary duties and other applicable considerations.
Our areas of focus have included whether information obtained from discussions with company management constitutes inside information, when price sensitive information ceases to qualify as inside information, and appropriate control procedures to ensure compliance with Chinese Wall requirements under the SFO.
We have advised a number of trading firms and portfolio managers, including a number of activist short sellers, in respect of Hong Kong regulation of investment research and market commentary and in particular, the scope of permissible content and changes which may be needed in research or commentary reports to minimize the risk of liability. We represented an activist short seller in Hong Kong in proceedings before the Market Misconduct Tribunal (“MMT”) instituted by the SFC for breach of the market misconduct prohibition under the SFO for the disclosure of false or misleading information inducing transactions.
We regularly assist hedge fund managers to prepare for SFC inspections (also known as SFC field audits) and to handle SFC investigations alleging wrongdoing on the part of the managers. We have an active white collar crime and regulatory defence practice, giving us an up-to-date understanding of the current regulatory climate and SFC enforcement trends. This also enables us to provide hedge fund managers deep insight into potential regulatory implications of their proposed business activities, as well as the options which may be available to pre-empt any regulatory concerns or enforcement actions.
How We Can Help with Fund Restructuring
Changes in key personnel, investor base or tax or regulatory requirements or the illiquidity of portfolio investments made may necessitate a change in hedge fund structure or the structure of a hedge fund management group. We set out below some of our experience in addressing these situations..
We have assisted a number of hedge fund managers to restructure funds. We can assist with dividing, allocating and transitioning investors, assets and liabilities from one fund vehicle to another, taking into account management and performance fees as well as other costs chargeable to the original fund. We can assist splitting fund management operations into multiple fund managers.
We can advise on whether it is appropriate to re-domicile a hedge fund from an offshore jurisdiction such as the Cayman Islands back to Hong Kong and, if it is appropriate, we can assist hedge funds to transition from the offshore jurisdiction back to Hong Kong, migrating investors as well as assets and liabilities of the fund.
We advise hedge fund managers managing a simple fund on whether a master-feeder structure is appropriate for them, working with local counsel to determine the legal, tax and regulatory demands of the investor’s jurisdiction. As a corollary, we advise on whether changes to the management group structure may be necessary or desirable to onboard investors from a particular jurisdiction.
We have experience advising on the restructuring of a hedge fund to add feeder funds, to ensure that the existing fund is appropriate to serve as a master fund, to change management group structure and to transition investors from one fund vehicle to another fund vehicle.