Grounded Ingenuity | Refined Results

January 11, 2021
Gavin Cumming, Timothy Loh
Traditionally, for Hong Kong based managers, the preferred hedge fund structure has tended to be an offshore company, typically domiciled in the Cayman Islands. Recent enhancements to Hong Kong’s open-ended fund company (“OFC”) regime in September 2020 as well as an increasing number of challenges arising from changes in the Cayman Islands, however, make an OFC a compelling alternative for hedge funds. If you want to know more about the advantages of setting up or re-domiciling OFCs in Hong Kong, please contact our Hedge Fund or Hedge Fund Taxation lawyers.

There are a number of key advantages for a Hong Kong hedge fund manager in using a Hong Kong OFC compared to using an exempted company (“EC”) or a segregated portfolio company (“SPC”) registered in the Cayman Islands.

Preferential Tax Treatment of OFCs

Hong Kong hedge funds in the form of OFCs enjoy preferred tax status compared to Cayman Islands registered hedge funds because they are exempt from Hong Kong profits tax on a wider range of asset classes.

Under the Unified Funds Exemption, a fund may be exempt from profits tax on profits from transactions (“qualified transactions”) in specified asset classes as well as on profits from transactions (“incidental transactions”) incidental to those qualified transactions. However, the exemption only applies to the extent that profits from incidental transactions do not exceed 5% of total profits. In other words, the exemption caps relief for incidental transactions at 5%.

Unlike Cayman funds, OFCs are not subject to these limits as long as they continue to focus on investment activities.

First, for OFCs, profits may be exempt from tax even if those profits relate to transactions that are not qualified transactions. In other words, OFCs may transact in a wider range of asset classes and still enjoy relief under the Unified Funds Exemption. Cayman Islands registered funds (indeed, all non-OFC funds) must ensure that their transactions are qualified transactions in order to be eligible for relief.

Secondly, where OFCs engage in qualified transactions, there is no cap on relief for incidental transactions. In other words, OFCs may earn more than 5% of their profits from incidental transactions and still qualify for relief under the Unified Funds Exemption. For hedge funds engaged in qualified transactions, the absence of a cap on incidental transactions gives greater certainty and flexibility, as there is no need to determine whether a transaction in fact qualifies as an incidental transaction. For example, where a credit fund in the form of an OFC holds debt securities to generate interest income, it can be certain that all such income will qualify for relief, whereas a credit fund in the form of a Cayman Islands registered fund will be subject to the 5% limit.

Simplified Capital Raising

Whilst both OFCs and Cayman Islands registered funds may raise capital in Hong Kong using the professional investor exemption under the SFO, a Cayman Island registered fund must, in addition, always ensure that each investor is investing a minimum of US$100,000 to comply with Cayman Islands requirements. However, when an OFC uses the same professional investor exemption, there is no minimum amount that each investor must invest.

Should an OFC choose not to use the professional investor exemption under the SFO to raise capital in Hong Kong, then the OFC can simply set its minimum investment amount at the lower figure of HK$500,000 (approximately US$65,000) to avail itself of the minimum investment size exemption under the Companies (Winding Up and Miscellaneous Provisions) Ordinance. This figure is lower than the US$100,000 set by the Cayman Islands.

Lower Operating Costs for OFCs

The cost of establishing and operating an OFC is likely to be significantly lower than the cost of establishing and operating a Cayman fund.

Government fees in the Cayman Islands are high relative to those in Hong Kong:

Fee Item

Hong Kong

Cayman Islands

Incorporation fees - single fund



Registration fees - single fund



Tax Exemption Certificate

Not applicable


Annual fees

Not applicable


Perhaps more importantly, a Hong Kong based hedge fund manager using an OFC is likely to enjoy substantial savings as a result of dispensing with the entire layer of Cayman service providers.

Streamlined Compliance Burdens

The use of a Hong Kong OFC allows a Hong Kong hedge fund manager to focus on a single legal and regulatory regime and a single regulator, namely the Securities and Futures Commission (“SFC”).

The OFC regulatory regime itself is light touch. For example, unlike the Cayman Islands, there is no requirement for a private OFC to file its prospectus or marketing materials with the SFC as a pre-requisite to registration. In contrast, a Cayman Islands registered fund is required to file its offering memorandum, summary of terms, or marketing materials (as applicable) with the Cayman Islands Monetary Authority (“CIMA”) to effect a registration. Hong Kong thus offers a hedge fund manager the flexibility of registering the OFC first and then filing the prospectus or marketing materials as soon as practicable after those have been issued.

Hong Kong hedge fund managers will likely find compliance with anti-money laundering laws easier with an OFC than with a Cayman fund. First, in onboarding investors, such managers will only need to comply with Hong Kong anti-money laundering requirements administered by the SFC. They will no longer need to comply with both Hong Kong anti-money laundering requirements well as with Cayman anti-money laundering requirements.

Secondly, there will no longer be a need to designate and appoint an Anti-Money Laundering Compliance Officer, a Money Laundering Reporting Officer, or a Deputy Money Laundering Reporting Officer for the purposes of complying with the Cayman Islands regime or to collect documents and information only required by the Cayman Islands.

Greater Legal Certainty in Asset and Liability Segregation

Where an OFC is used to create an umbrella fund with multiple sub-funds, the fund manager can be assured that under Hong Kong law, the assets and liabilities of each sub-fund will, in fact, be legally segregated from each other. This is significant for Hong Kong based hedge funds engaged in investment strategies which may involve significant or indeed, unlimited liability. If one sub-fund incurs liabilities in Hong Kong in excess of its assets, there is absolute certainty that those liabilities cannot be satisfied from the assets of a different sub-fund.

The same is not true for Cayman based hedge funds including Cayman SPCs. Though an SPC structure also segregates assets and liabilities of different segregated portfolios, it does so under Cayman law only. There is no assurance that Hong Kong courts would recognise the segregation of the assets and liabilities of each portfolio of the SFC. There is a real risk that because Hong Kong law regards the SPC as a single legal entity, it would make the assets of the SPC as a whole available to satisfy the claims of creditors of a single segregated portfolio of that SPC.

For Hong Kong based hedge fund managers engaged in high liability investment strategies, the use of an OFC offers a superior means of addressing investor concerns that their investments in one sub-fund will be used to satisfy liabilities of a different sub-fund.

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