This circular clarifies the requirements for authorizing closed-ended alternative asset funds seeking a listing on the Stock Exchange of Hong Kong Limited ("SEHK"), including overarching considerations, management company requirements, listing agent, investments, distribution policy, valuation, disclosure, investor education, and distribution by intermediaries.
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On February 17, 2025, the Securities and Futures Commission ("SFC") published a circular detailing the requirements for authorizing closed-ended collective investment schemes known as Alternative Funds. These funds primarily invest in private, illiquid assets, which may not comply with the liquidity and investment requirements under Chapter 7 of the Code on Unit Trusts and Mutual Funds (UT Code).
The fund must have a sizeable market capitalization of HK$780 million (US$100 million) at listing, and its performance, dividend policy, underlying investments, and track record will be considered by the SFC. Management companies must satisfy the requirements set out in Chapter 5 of the UT Code, demonstrating experience and resources in managing alternative assets.
A listing agent must be appointed in accordance with Chapter 20 of the Listing Rules. The fund must establish procedures for public holding and open market trading of units or shares, with at least 25% held by the public. The requirements of Chapter 7 of the UT Code generally do not apply, and the fund should maintain a well-diversified portfolio with borrowing not exceeding 30% of net asset value ("NAV").
Funds may adopt a fund-of-funds structure, investing up to 20% of NAV in underlying funds that align with the fund's objectives. The fund must disclose its distribution or dividend policy, which should not result in capital decumulation, and publish its NAV quarterly. Valuation must comply with UT Code requirements and include key valuation assumptions and parameters in annual reports.
The SFC may authorize well-established Alternative Funds listed elsewhere with comparable regulatory requirements. Offering documents must include disclosures about investment objectives, frequency of NAV publication, valuation policies, and key risks, especially those relating to valuation transparency and uncertainties. The product key facts statement ("KFS") should detail key valuation assumptions and parameters for illiquid assets.
The management company is expected to provide extensive investor education before launching. Intermediaries must assess clients' knowledge of investing in Alternative Funds before effecting a transaction, unless the clients are institutional or qualified corporate professional investors. If a client lacks knowledge, the intermediary must provide adequate training and risk disclosure statements.
The SFC may impose additional conditions or allow flexibility from strict compliance with certain requirements, taking into account the fund's nature and investment strategy. Prior consultation with the SFC is required before applying for authorization. For clarification, contact the team supervisor or case officer of the Investment Products Division.
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