1. finance
2. investing
3. funds
4. mutual funds

Citi OpenInvestorSM
Coming to Hong Kong? – How to Set Up
Insights | Institutional Investors
“So, you are thinking of setting up in Asia?” “Which is better, Hong Kong or Singapore?”
“Hong Kong is good for China access. Right?”
How often have we heard these words over the years?
Actually quite a lot, especially in the last few years, as the
European and US economies have stuttered. But all too
often setting up in Asia can be far more complex than people
imagine. The purpose of this article is to give some basic
guidance on many of the do’s and don’ts of setting up, what to
look out for, and many of the issues to be aware of in taking on
this responsibility. This is something that cannot be achieved
overnight, despite the famous “can do” attitude prevalent in
Asia, but with both sufficient planning and selection of the
right partnerships, it can be achieved smoothly.
For the purposes of focus, this publication will mainly refer
to establishment in Hong Kong. There are many similar
circumstances in Singapore to those found in Hong Kong,
thus seeking guidance and advice will usually be of paramount
importance for those embarking on this exercise.
1. Why Do You Want to Come to Hong Kong?
a. “Because everyone else is there already?”
Yes, this is almost true. Of the top 100 global fund managers,
77 have already established a licensed entity. All but one
of the top 25 managers are also here. There are Sovereign
Wealth Funds and international pension funds also with
offices in Hong Kong, often with a view to providing research
on Asian fund managers and markets for their Head Offices.
Many of the global fund managers are very active in the
local market, offering both retail and institutional fund
management products and services. The global names
have a far more dominant position in the market than local
firms. A number of them have been located in Hong Kong
continuously for 30 or more years. But this is not the only,
or even the key reason for being in Hong Kong. Most of those
that have arrived in recent years have cited one or more of
the following reasons why they chose Hong Kong as their
point of entry to Asian markets.
Key Reasons for Setting up in Hong Kong:
i. Rule of Law, and relatively straight forward
regulatory environment
ii.
Availability of all necessary services to complement
the fund management business: administration, investment banking, securities broking, etc
iii. Multiple institutional investors, including sovereign wealth funds, pension and endowment funds,
family offices
iv. Active retail funds market, plus immediate access
to Taiwan and Singapore
v. English-speaking business environment
vi. “Open architecture” bank distribution of funds
vii. UCITS products readily accepted
viii. The Hong Kong public invests globally
b. “To enlarge the current global footprint of the business?”
This is indeed a very understandable objective. As fund
management has become infinitely more global, having
local offices with direct access to the key stock markets
around the globe has become an essential, in order to
compete effectively for some of the biggest institutional
mandates available.
From Hong Kong it is possible to get access to all 17
Asia-Pacific stock markets, either directly or via the
many investment banks that service the region.
Also, many asset management businesses are finding
a more “hostile” environment being created in some
Western domestic markets, thus encouraging them to
seek their fortunes elsewhere.
c. “To manage assets or to distribute products, or both?”
Hong Kong has proven to be an ideal location from which
to start in Asia. Apart from giving the new entrant market
access, it also provides a thorough education on the many
different ways and habits of Asian and Chinese investors,
that are often very different to those in the West.
With a regulatory regime that can accommodate “all
comers”, Hong Kong allows fund managers to make their
own choices on how they wish to participate in the market.
From having a simple research office, to having a “full
service” investment and marketing office, the choice is
available to be made. The local licensing regime allows
choice as well, see “SFC License Types” on the right.
There has been no shortage of choice for retail investors
when selecting mutual funds to invest in. There are around
1,850 currently authorized for sale locally, of which only
15% are local funds, with the vast majority having been
established in the UCITS regimes of either Luxembourg
or Dublin. Thus the market is very familiar with this type
of product.
2. Getting a License
The financial services business is one of the most highly
regulated businesses in the world. It is no different in
Asia from anywhere else these days. One distinguishing
feature may be the relative experience of the Regulator and
willingness of it to allow foreign participation in the local
market. Hong Kong stands “head and shoulders” above
the rest of the Asian region (with the possible exception
of Singapore), in providing a totally open market for all
who wish to enter. New entrants can choose whether to
have a very simple business, just providing analysis of the
regions stock markets, or to have a more comprehensive
business providing a variety of services to investors.
What remains constant however is the need for both the
business and the individuals working out of Hong Kong, to
be appropriately licensed by the Hong Kong Securities and
Futures Commission (SFC).
There are different requirements depending on the type of
business set up. Typically an asset management business
would require an SFC License under one or more of the
following categories:
SFC License Types for Asset Management Companies
i. Type 1 – Securities Dealing
ii. Type 4 – Securities Advice
iii. Type 9 – Asset Management
For each type of License, the SFC requires an Application
that sets out in detail the type of business intended to be
undertaken, a business plan, and staffing intentions. There
is a set of detailed application forms/supplements that
should be completed that provides both the degree of
answers the SFC is looking for and, for the applicant,
the opportunity of understanding the type of regulatory
oversight the SFC undertakes.
Two senior-level staff will be required as Responsible
Officers (RO), which implies they take a high degree of
responsibility on behalf of the business to ensure it
complies with the requisite licensing rules and regulations.
a. Lawyers
The business of obtaining a license can become very time
consuming. It is recommended that overseas applicants use
lawyers with the relevant experience necessary to make the
application on their behalf. Far too often, and there have
been innumerable examples, “wrong answers” or incomplete
applications are given to the SFC, who will then just insist on
getting correct and complete information before proceeding.
However, the SFC makes a point of saying to applicants that
they don’t provide advice to the applicant on what license
should be applied for. They encourage use of local lawyers
for the purpose, as they also provide a useful “filter” to
ensure the application is completed correctly and fully.
There are many legal and compliance firms in Hong Kong
that claim suitable experience in dealing with SFC matters.
The key is to find those firms that are appropriate for the
asset management business, rather than for other areas
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of financial services. These include both local firms and
the Hong Kong office of global firms of lawyers. There are
some firms, within the asset management space, that are
specialist in say exchange traded funds (ETF), or hedge
funds, or retail products. It is usually far better to select a
firm based on local experience too. A list of recommended
firms can be provided on request.
b. License type
For both the corporate entity and the individual within the
organization, there are a multitude of license choices that
can be made. Generally, for asset management businesses
wanting to offer “full service”, including securities dealing
and retail funds, it is best to get Types 1, 4 and 9. For those
firms that are only seeking to establish a local office of a
global firm, without fund management activities in Hong Kong,
a simpler choice of Type 1 and 4 can be made. Again, it usually
helps to get legal advice when making this decision, however
it is always possible to change and/or upgrade licenses later on.
Something that should be taken into account however,
although the SFC won’t give direct advice on which
license type should be applied for, they make the point
that they have an “open door policy” and thus welcome
the opportunity to meet potential applicants before an
application is made, to discuss business plans and to learn
something more about the business. New market entrants
are well advised to take up this opportunity.
c. Setting up in business
Once the decision has been made to enter the Hong Kong
market, all the usual legal and corporate formalities need to
be carried out. Again, another good reason to hire a local
firm of lawyers to handle this on your behalf, as they have
the experience and connections with which to complete this
task painlessly.
But where to locate? There are multiple choices of office
location available. Another issue to consider is the cost
of office space. Within the Central Business District of
Hong Kong the cost of offices has become among the
most expensive worldwide. Further, the availability of the
right amount of space for your needs can often be difficult
to achieve. Fortunately there is a good supply of “virtual”
and shared office space run by the usual providers of these
services. Many of the largest buildings have these service
office facilities, making it easy to get started, before moving
on to something more permanent. Whilst there is no single
location where most managers have set up, Central in
Hong Kong is a very convenient location where it is possible
to reach most parts within 10 to 15 minutes, mostly under
cover, for when it rains or during the stormy season.
d. Business plan
As part of the application for a license from the SFC, it is
necessary to provide a Business Plan setting out for the
Regulator the primary objective of the business. While this
does not need to be exhaustive, nor does it need to contain
detailed financials, it does need to cover the intentions.
Thus, if it is intended to seek retail business, the Business
Plan needs to both say so, and confirm the intention of
submitting mutual funds to the SFC for authorization
purposes. If on the other hand the intention is to only seek
institutional business, and thus there are no retail funds
to be offered or needing authorization, this can lead to a
different and sometimes faster processing of an application.
e. Responsible officers, staff licenses
One of the mandatory requirements of the SFC in granting
a license, is that the business needs to employ a minimum
of 2 Responsible Officers (RO) per each type of licence.
The ROs needs to have had a minimum of 3 years relevant
experience over the past 6 years (relevant to the business
and products being offered), and pass a local regulatory
framework examination. The SFC expects that at least one
RO should be in Hong Kong and available at all times. For
overseas persons appointing as RO, the non-resident RO
has to demonstrate to the SFC how they can supervise the
regulated activities in Hong Kong.
f. Time line
The SFC has recently let the fund management industry
know that the processing of applications for licenses has
been improved and that it is much quicker than previously.
Nevertheless there remain many stories and actual
examples of license applications that have taken up to 12
months or even longer in a couple of instances. Invariably,
when checking these out, it can be found that the applicant
(and/or lawyer acting) has made multiple errors, leading to
such delays.
Typical Errors Made on SFC License Applications
i.
Applying for the wrong type of licence
ii.
Failing to respond to the SFC questions promptly
iii. Failing to provide sufficient or correct information and answers to questions arising
iv.
Changing the license type mid-application
v. Changing the names of ROs or other key staff,
mid-application
vi. Change of shareholders (of the business) and/or
not providing details of them
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The SFC does have a good record of completing licence
applications promptly, if all is completed correctly and
efficiently. It has internal guidelines on delivering a response
within 15 weeks of the last round of any questions it might
have. The number of rounds of questions can be substantial
and are usually a reflection of the quality of submission
and prior responses. It can often be quicker than that.
Provisional licences can be applied for individual applicants
in that they are allowed to have a six-month grace period
to pass the required examination and a provisional licence
is granted subject to this condition. Moreover, processing
for an individual licence is much faster for someone with an
existing license, just changing jobs from one firm to another.
However, it should be noted that individual licences would not
be granted until the corporation is approved with a licence.
3. What Products do You Plan to Sell?
Most asset management businesses can clearly identify their
primary business objectives. Often it is either institutional or
retail. Either managing assets for pension funds, sovereign
wealth funds and other institutional investors, or offering
mutual funds, ETFs, hedge or alternative funds or other
similar products for sale to the investing public.
Depending on which type of business you plan to do, the
choice and range of services needed to set up can differ
widely. For example, for a retail focused business, often
a Transfer Agency will be needed, to ensure purchase
and redemption deals in a fund are efficiently processed,
correctly documented and the client appropriately informed.
For an institutional-only business, you might consider it
necessary to have rapid access to end-of-month valuations.
If you are an ETF business, you will also want to be listed
on a local stock exchange, and with that comes another
assortment of issues to be resolved.
In Hong Kong, the vast majority (80%+) of mutual funds
sold to the retail investor are UCITS-type products originating
out of Luxembourg or Dublin. Thus, if you have this type
of product to be sold, the administration and operations
requirements will likely be a lot less onerous than if you were
setting up domestic funds.
If you are a Hedge Fund or Alternative Investment fund, then
it is possible your fund domicile is in a “sun drenched island”
such as The Cayman Islands, Bermuda or Bahamas. Whilst
these locations used to be de rigor a few years ago, no longer
are they so useful, as both the US and Europe build their
barriers to entry to non-regulated products.
Hong Kong SFC-Authorized Funds and Assets Under Management by
Domicile, March 2007–March 2012
Analyst notes: Asset figures represent the total value of SFC-authorized mutual funds, not the amount sold in Hong Kong.
Total NAV is taken as of previous year-end.
Mar-07
No. of
Funds
Domicile
Total
NAV
(US$ bn)
Mar-08
No. of
Funds
Total
NAV
(US$ bn)
Mar-09
No. of
Funds
Total
NAV
(US$ bn)
Mar-10
No. of
Funds
Mar-11
Total
NAV
(US$ bn)
No. of
Funds
Total
NAV
(US$ bn)
Mar-12
No. of
Funds
Total
NAV
(US$ bn)
Hong Kong
100
11.6
109
18.6
115
16.3
170
31.9
200
36.8
261
33.4
Luxembourg
1,015
644.8
1,163
710.9
1,204
361.9
1,195
597.7
1,161
759.7
1,070
634.1
Ireland
341
180.5
338
238.0
351
177.0
280
196.1
289
259.3
282
217.9
Guernsey
35
6.6
37
8.4
4
0.1
3
0.001
3
N/A
3
0.0
United
Kingdom
44
35.8
50
58.1
49
30.6
56
40.0
58
50.1
53
40.3
Cayman
Islands
384
22.0
366
25.8
299
10.9
213
9.4
183
11.3
157
11.1
Others1
61
9.0
60
17.5
71
31.5
51
51.8
50
70.8
37
77.1
1,980
910.3
2,123
1,077.2
2,093
628.3
1,968
926.9
1,944
1,188.1
1,863
1,013.9
Total
Source: Hong Kong Securities and Futures Commission, Cerulli Quantitative Update – Asian Distribution Dynamics 2012
1
Others includes funds registered in other European countries, Bermuda, the British Virgin Islands, and other miscellaneous countries.
4
Yearly Gross Sales Breakdown by Major Fund Categories
100%
Equity Funds
90%
Bond Funds
80%
Warrants, Futures and
Options Funds
Balanced Funds
70%
Guaranteed Funds
Others*
60%
50%
40%
30%
20%
* Include Money Market Funds/
Liquidity Funds, Equity Index
Funds, Fund of Funds, Hedge
Funds and Other Funds.
10%
0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
up to July
Source: Hong Kong Investment Funds Association Sales and Redemptions Survey, up to July 2013
It is essential to choose carefully the type of products
you will be likely to sell to clients in Asia. Whatever your
choice can determine a number of other key issues. These
include: the type of license you need to apply for; the level of
set up needed for the office; the numbers of staff you need
to recruit.
Typical Product Choice for Funds in Hong Kong
i.
Local funds
ii. ETFs
iii. UCITS/SICAV products
iv. Pension funds
v. Institutional portfolio management
vi. Hedge or alternative funds
vii. Private equity
viii.REITS
The key “open” markets of Asia are Hong Kong, Singapore
and Taiwan. Around 80%+ of fund sales are of the UCITStype from Luxembourg or Dublin in Hong Kong and
Singapore, and around 60% in Taiwan. In most other parts
of Asia it is local/domestic product that succeeds. It is
probable however, that a new arrival to the region would
want to build some experience with existing products first,
before then embarking on the creation of a new business.
a. Institutional or retail?
Many new arrivals to the Asian fund management business
will look at the region’s retail distribution model for mutual
funds and consider it to be too hard to break into. While there
are always opportunities for those offering exceptional funds,
top rated performance or niche products for investment, it
is also true that the retail funds markets of Hong Kong and
Singapore are looking a little overcrowded.
Nevertheless, the same is not so true about the institutional
markets of the region. With many Sovereign Wealth Funds,
pension funds, endowments and other institutional portfolios
that outsource part of their assets to third party managers,
there remains many more and perhaps somewhat easier to
access, opportunities for those new to Asia.
5
Whilst no published figures are available, it is widely
estimated that the major institutional investors in China,
Hong Kong and Asia generally, have outsourced some part
of their assets for management to at least 200 different
fund managers. A couple of the major institutions may have
more than 80 external relationships alone. Often, they will
review these outsourced management contracts every three
years, unless there has been some significant change to the
relationship, either through poor performance, change of
individuals managing the assets, or service errors. Either
way, there clearly are many opportunities for fund managers
to win mandates, especially if they can offer skills that are
not simply a replication of what is already available and/or
being used in the market already.
Another advantage of only seeking institutional business,
is that it can make the SFC License application easier to
obtain. Only dealing with professional investors excludes the
need for scrutiny on offering retail products, which would
otherwise be necessary for a license to be granted.
Hong Kong has many pension funds in the US$300 million to
US$5 billion category. The larger of these will often employ
their own specialists to oversee and manage the portfolio,
whereas the medium and smaller funds will often seek
advice for external consultancy by firms of actuaries.
Hong Kong Retail Fund Yearly Gross & Net Sales
in US$ billion
Gross Sales
54.9
50.9
50
Net Sales
45.5
40
Gross Sales
(3-year rolling average)
37.5
Gross sales
(5-year rolling average)
28.8
30
24.3
20.3
19.5
20
15.0
14.1
12.6
10
Net Sales
(3-year rolling average)
18.0
14.0
11.2
9.5
4.1
4.6
6.9
3.2
2.6
1.2
6.2
3.8
Net Sales
(5-year rolling average)
6.2
2.5
0
-4.6
-10
2001
2002
2003
2004
2005
2006
2007
2008
2009
b. Traditional, hedge, alternatives, REITS
As indicated elsewhere in this document, there is widespread
use of UCITS mutual funds in Hong Kong. Due to the somewhat
stricter criteria for gaining SFC authorization, hedge and
alternative funds have never managed to succeed in the
retail space, although at times they have done reasonably
well in the private banking and HNWI markets. Unlike in
Europe and the US however, hedge and alternative funds
have failed to gain any popularity among institutional
investors, particularly local pension funds.
2010
2011
2012
2013
up to August
There are many hedge and alternatives funds that have set
up in Hong Kong, as the licensing requirements for doing so
are relatively straight forward, and not much different than
for traditional fund managers. In setting up as a hedge fund
however, managers should not expect to raise much money
locally, and should seek to target the usual sources of capital
from Europe and the US.
REITS in Hong Kong have had limited public appeal, since the
launch of the first product to be authorized by the SFC, The
Link REIT, some years ago.
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c. Pensions, MPF or ORSO?
Hong Kong established a mandatory retirement scheme to
cover all employees in Hong Kong in 1999. The Mandatory
Provident Fund (MPF) now covers more than 2.3 million
employees, who are required to contribute 5% of their
salary up to HK$7,100 (from November 1, 2013) per month.
Employers are likewise required to contribute 5% of salary
up to HK$7,100, per month. Since launch the MPF has had
around 20 providers of products, with a choice of more than
450 funds. The market has however, been dominated by
a small number of banks and insurance companies, which
between them have more than 90% market share, leaving
little scope for the small players. There have been no new
entrants to the MPF market since it was launched, and
there have been very few corporate changes either, both
due to the complexity of the regulatory issues involved in
this business. Nevertheless, as assets in MPF products now
exceed US$55 billion, it represents an attractive, long term
and stable pool, if able to be accessed.
The Occupational Retirement Scheme Ordinance (ORSO)
was the prior retirement scheme in Hong Kong, and is
slowly being phased out, in favor of MPF. Nevertheless,
ORSO schemes are more attractive and less restrictive
from the point of view of fund managers. They provide
broader investment scope for the assets, and at around
US$30 billion, are still big enough to attract attention from
the big firms. It will usually be ORSO schemes that provide
pension fund management opportunities for new as well as
existing fund managers in Hong Kong.
d. UCITS, local, Cayman, etc.?
UCITS funds from Luxembourg or Dublin represent around
80% of the 1,850+ SFC authorized funds able to be sold
to retail investors in Hong Kong. As is evident, the SFC will
readily authorize these products, provided the fund manager
is also licensed. Likewise, Cayman Islands, Bahamas,
Bermuda, Channel Islands are jurisdictions that the SFC
has readily accepted for the purpose of domicile for funds
authorized in Hong Kong.
But this could all change!
In January 2013, the SFC made known that it had been in
discussions with the CSRC in China to create a “mutual
recognition scheme” whereby those unit trusts or mutual
funds that are domiciled and authorized in each other’s
jurisdiction could be recognized for cross-border sale in
Week 1
Submit application
• Checklist
• Prospectus
• Detailed information
Hong Kong and China. As the size of the Chinese funds
industry and investor population is around 100 times that of
Hong Kong, clearly this represents a massive opportunity for
those fund managers in Hong Kong that have products that
could qualify. As a result of this, there has been a marked
increase in the creation of Hong Kong-domiciled funds since
the beginning of 2013, and when the “mutual recognition
scheme” eventually gets started, it is forecast there may
well be even further growth in this area.
A point worth noting however, is the absence of any US
mutual funds. Although it is technically possible to have
these authorized, in practice none of the major US mutual
fund providers have done so, preferring, where they have
them, to use UCITS products from Luxembourg or Dublin.
It could be argued that this is an opportunity for someone,
in due course, however, it is also the case that historically,
Asian, and especially Hong Kong investors, have had very
little interest in investing into the US equity markets via
mutual funds.
e. Getting funds authorized
Getting funds authorised by the SFC in Hong Kong has
become a well travelled route. Without doubt, unless the
firm has employed multiple experienced lawyers in its own
staff, this is a role for which the local legal profession is
well suited. Depending on the complexity, type, nature, etc.
of the funds concerned, it is usually best to select lawyers
with a well established team with the necessary experience,
to handle the authorization process. The SFC has a clearly
documented regime for making applications for fund
authorization. Completing the SFC “Checklist” in itself will
ensure the gathering of information, documentation, and
supporting material. The best advice to be given to any
firm seeking funds authorization, is to ensure there is the
minimum time delay in responding to any SFC enquiries, and
that answers given are full and accurate. It is surprising how
few actually do this!
f. Time line
Below is an approximate time line of the process for a mutual
fund to be authorized for sale by the SFC in Hong Kong. There
can be no certainty this can be achieved, indeed there have
been a number of occasions in the last 5 to 10 years where
the time frame has been nine or more months. Further,
if there is anything complicated about the product, or if
there is any use of derivatives, the time frame shown can
automatically be doubled.
Week 3/4
Answer first round questions
• All answers complete
• Reply to further SFC questions
Week 10/15
Answer second, third or
more round questions
• Prepare constitutive documents
• KFS, prospectus
• Chinese translations
• Marketing documents
Source: Information from Hong Kong Securities and Futures Commission and market sources
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4. People
Getting right the recruitment of people for international
businesses can be one of the most frustrating and difficult of
tasks facing any organization. There are so many options:
“Do we send someone from Head Office?”
“Who should we recruit locally?”
“They have no experience of our corporate culture.”
“How can we trust them if they haven’t worked for our
business before?”
These are just some of the many issues facing those seeking
to enter a new market. It doesn’t matter the industry, these
are common problems across all businesses. There are no
easy and simple answers. There does have to be something
of a “leap of faith” when recruiting anyway, doing it from
Europe or North America for Asia, just widens the distance.
a. Hiring
The most frequent question asked by non-Asian firms
looking to hire in Hong Kong, is about the language skills of
those they wish to hire. “Do we need someone who speaks
Mandarin?”. “Is Hong Kong business done in Cantonese,
Mandarin or English?”
Hong Kong has had an active mutual funds business for at
least 25 years now. The institutional business market has
been going for over 30 years. The industry has accumulated
many talented people, with all the necessary skills required
to succeed.
For retail funds distribution, “wholesalers” as these people
are often referred to, will generally be those best able to
provide the degree of support necessary for the major
distributors. These are the banks throughout Hong Kong.
Their requirements are for support in the form of training,
promotion, branch visits, etc. Given that the vast majority of
those being communicated with are likely to be Chinese, and
of these, most likely their first language will be Cantonese,
this will be the requirement of a wholesaler.
If looking to hire people that can service the Taiwan and
China markets, then Mandarin Chinese will be the necessary
language.
b. How to hire? Using head hunters
Hong Kong has a large number of recruitment advisers and
head hunters. Many of the major global firms are here, and
there are a number of local firms with a substantial presence
in the market. Asset management recruitment has often
fallen into two distinct camps. First, it will be the recruitment
of analysts and fund managers, i.e. those actually managing
the money. Typically, these people will be knowledgeable of
the Asian region markets, particularly China, most likely will
have worked in fund management for a competitor. Prizing
them out can be a challenge, often solved through higher
salaries, bonuses, or other financial incentives.
Second, the recruitment of marketers has become
something of a more specialist art. Having contacts with
firms (and individuals within them) becomes far more
important. Given the relative levels of staff in these positions,
often the recruitment firms will maintain lengthy lists of
names of those within each organization, and roll these out
for each assignment.
Choosing whether to pay a retainer fee to recruit, or work
on a success contingency fee is as much about which firm
to choose to work with. Some can offer both routes, but
most prefer the former route, as it ensures they get paid
regardless of success.
As an alternative, recruitment advertising is usually on
Saturdays in the main English-language newspaper. There
is also an on-line recruitment service that is popular for
administrative and middle grade staff.
c. How many do you need?
Many new arrivals to the Hong Kong market use as their
benchmark, their staffing levels in other locations. This can
often provide a false picture, as within Hong Kong there is
little “travel” required between meetings, thus more time
can be spent with clients. Usually, getting started with a
modest number for each discipline makes sense, but this can
be changed quickly if, for example, the manager is included
in the distribution platform of one of the major bank
distributors where greater resources will be required.
Clearly account needs to be taken of potential expansion
to other regional markets. Many people in Hong Kong have
had cross-border working experience, especially for China
and Taiwan.
For the institutional business, many of the key contacts at
target clients will have excellent English language skills,
and given that they will often require to meet the manager
of their assets, not simply the marketer, the importance of
language skills is greatly reduced.
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5. Distribution
What and/or who is the target market for your products?
Usually fund companies offering mutual funds are looking
to get “distributors” to take their products and sell them
on to end-investors. In most parts of the Asian region,
distributors are generally the consumer banks, and they can
have a dominant presence in many markets also. Typically,
in Hong Kong, financial companies such as banks can
control more than 80% of the distribution of mutual funds.
Thus it is of utmost importance to be able to get onto the
distribution lists for these organizations. This is not easy,
many banks have no need or desire to add more products
to their distribution shelf-space, believing they already have
too much product.
Banks expect their fund company providers to be capable
of providing equivalent levels of service and support to
that already being received from existing providers, before
adding new fund houses onto their shelf space. This can be
very challenging for a new market entrant.
Insurance companies are increasingly looking to distribute
mutual funds as well. Their achievements to date have been
modest, but with approximately 50,000 insurance agents
in the market, there remains good potential in this area.
They are a useful alternative platform to that offered by banks,
but will often require products that are less “mainstream”
in nature, i.e. there is some niche about where they might
be invested.
a. Who sells funds?
Fund distribution in Hong Kong is dominated by the retail/
consumer banks, who together with private banks, are
estimated to have a market share of around 80% of sales
and AUM. Insurance companies are forging an increasing
market share, albeit still quite small, as they train up their
large sales teams to use mutual funds either directly or
via investment linked assurance schemes (ILAS). Wealth
managers (non-bank), securities and stock brokers,
independent financial advisers (IFA) make up the balance of
sales, but their proportion remains quite small.
An issue that can often surprise new entrants to the Asian
markets, especially those from the US and UK, is that the
Asian institutional market has not been a user of mutual
funds. Indeed, only in the last year or two have they begun
to recognize and understand the benefits and usage of ETFs.
In this respect, Asia and Hong Kong is some distance behind
established Western markets.
b. Getting onto bank distribution lists
As stated, this is no easy task. Banks in Hong Kong dominate
the mutual funds distribution scene, with around 80% market
share. Each bank has its own methods to analyse a fund, the
fund manager, undertaking due diligence and compliance
reviews, all of which are quite separate from whether the
fund is a “top performer” or not. Depending on the bank,
there may be a wide choice of funds and managers offered,
or a very limited and focused list. The table below provides
some guidance to the differences.
Cerulli Chart of Fund Distribution in Hong Kong
Hong Kong Mutual Fund Assets Under Management by Distribution Channel, 2010–June 2012
100%
90%
3.2%
12.1%
13.6%
13.7%
0.9%
1.3%
80%
2.6%
3.0%
1.2%
Banks
Securities firms
70%
Insurance
60%
50%
Direct
68.6%
73.2%
71.4%
13.3%
10.9%
11.1%
2010
2011
Jun 2012
Independent financial
advisors/platforms
40%
30%
20%
10%
0%
Source: Cerulli Quantitative Update – Asian Distribution Dynamics 2012
9
List of Hong Kong Banks Distributing Mutual Fund
Distribution of Mutual Funds by Retail Banks in Hong Kong
Approved
List?
Specialist
staff as
“Gatekeeper”
Own Brand
Funds
Number of
Third Party
Funds
Ease of
Access
Volume
Sales
Citibank
Yes
Yes
No
Large
Average
Very High
HSBC
Yes
Yes
Yes
Small
Poor
Very High
Hang Seng
Yes
Yes
Yes
Small
Poor
High
Standard Chartered
Yes
Yes
No
Large
Good
High
Bank of East Asia
Yes
Yes
Yes
Medium
Average
Average
Bank of China Int.
Yes
Yes
Yes
Small
Poor
Average
Bank of Communications
Yes
No
No
Medium
Poor
Below Average
DBS
Yes
Yes
Yes/No
Medium
Average
Average
Fubon
Yes
Yes
Yes/No
Medium
Average
Average
ICBC
No
No
No
Medium
Poor
Poor
c. Dealing with “gate-keepers”
Each bank will likely employ experienced analysts, specialist
in reviewing mutual funds. Their role will be to determine
whether or not to include a fund and fund manager on the
house distribution list. These people, often referred to as
“gate-keepers”, are among the most important with whom
the fund company has to deal. They require a regular supply
of information and material about each fund approved for
use, they need the latest portfolio, details of any changes
that might occur, and updates on relative performance.
This information can often be “repackaged” to be able to be
sent out by the banks to their customers, either those who
may already have invested in the fund, or to prospective
investors, when promoting the fund for sale.
d.IFAs, insurance companies, securities companies,
banks, private banks
While it is the retail (or consumer) banks that are dominant
in distribution of mutual funds in Hong Kong, private banks
are also able to offer both significant volumes, and somewhat
different requirements from the mainstream. Private Banks
have tended to concentrate more on the alternative products
area, including use of hedge funds, structured products,
co-investment vehicles, and some property related vehicles.
Independent Financial Advisers (IFA) have become a very
small part of the funds distribution community. This was not
always the case, indeed 10 or 15 years ago they were still
quite a force, but through increased regulatory controls, and
the significant rise in banks’ distribution, the IFAs’ proportion
of total sales has dropped. Key reasons for this also include:
Tax – it is not an issue as for most individuals in Asia, there
is little or no tax to pay on their investments. Estate Duty or
Inheritance Tax: Places like Hong Kong have abolished this,
and many of the wealthiest citizens are now able to pass on
their wealth on death without tax considerations.
Most IFAs in Hong Kong tend to use insurance products
for their clients, often those issued by companies based in
the Isle of Man (offshore from the UK), which offer multiple
investment choices.
6. Media, Advertising, Publicity
One of the most common truisms of the advertising business,
is that it is impossible to know with any high degree of accuracy
how effective each advertisement is, but without any advertising,
no one will know of the existence of a product anyway! Over the
years, mutual fund advertising has ranged from “money-off-thepage” to branding-only types. While the former is generally no
longer allowed, the latter type is the most difficult to quantify
success with.
a. Which works?
From the point of view of “branding” then clearly some form
of distinctive advertising can be quite effective. Whether it
is on the side of a bus stuck in a traffic jam in the middle of
Central, or a 15 second slot in the middle of a news bulletin
on TV, trying to make prospective clients more familiar with
10
the “brand” or name of a business has become an essential
part of the development of the fund industry. In Hong Kong
there is an enormous choice of media outlets available,
which together with specialist financial publications, can be a
daunting prospect for a newcomer.
There has been evidence in the recent past also, that while
little account of advertising might be taken by investors,
they can and often are greatly influenced by word-of-mouth
encouragement, from friends on what products to buy.
This can therefore mean use of media promotion, articles,
advertorials, etc., can have greater impact than simply a
stand-alone advertisement.
b. TV or print?
Print has proven to be the more effective means of “speaking
to investors”. That is not to say that TV doesn’t work,
however the relative differences in costs, especially for
Chinese-language print and TV advertising is considerable
and somewhat prohibitive.
c. Display and/or outdoor?
Hong Kong has many alternative locations for advertising.
Whether it be a “Billboard” or the side of a bus or tram,
on the Star Ferry crossing the harbour all day and night,
or a hoarding atop one of the many buildings that face the
harbour, all have been used at one time or another by
companies in the asset management business.
d. Language issues
Chinese-language advertising reaches the majority of the
population in Hong Kong, although many, especially those in
the primary target group for mutual funds, can and do read
English, even if they are not always willing to speak it.
7. Where to Locate?
a. Own office or serviced offices?
This will depend entirely on how big an operation you are
wanting to set up. There are many choices available in Hong
Kong, ranging from the one-room serviced suite, to whole
floors of buildings. There are no regulatory restrictions on
setting up in a serviced office, many do. And as you expand,
then within that centre there may be further space available.
b. Hong Kong, Kowloon, Central or fringe?
It might seem obvious, to set up in Central, Hong Kong,
where all the competitors have already established offices.
But it is frequently the case that some choose to locate
outside this core business district. There are no obvious
benefits these days in being too far away from Central, as
rentals in office buildings throughout Hong Kong have risen
so far in the last 5 years. Where Kowloon, Wan Chai or Taikoo
Shing, all locations with office space, used to be significantly
cheaper than Central, this is no longer the case. Of course,
in the key buildings in the heart of the city, rentals have
doubled or more in the last 10 years, however, there are still
many offices in the surrounding areas, usually slightly older
and less flexible or convenient, that can be affordable for
those wishing to dip a toe into the market.
Choosing where to locate may be a secondary issue in
the plans when setting up in Hong Kong, however for
experienced “China hands” the knowledge of the “fung shui”
of an office will be a very important consideration. “Fung
shui” (which, among other things, is a study of the wind and
the light of a location), for many in Hong Kong can be the
single most important issue, as it determines the amount
of luck that a business might enjoy. There are many “fung
shui” practioners, who, for a suitable fee, will tell new arrivals
whether they have chosen the right location or not. It might
also be noted, that no financial business in Hong Kong would
ever consider NOT having a “fung shui man” visit their
premises to check it out, and recommend adjustments to
ensure the most favorable elements are in place.
8. What about China?
Hong Kong really is the gateway to China, and as a result of
recent regulatory developments, being established in Hong Kong
can give even greater and better opportunities north of the
border. These include:
i. The mutual recognition scheme for funds domiciled in
each others’ markets;
ii. RQFII3 (Renminbi Qualified Financial Institutional
Investor)
Citi has provided a number of other useful guides to these
issues, which are available on request.
a. Who needs a Joint Venture?
The Joint Venture Fund Management Company (JV FMC)
scheme in China has been in existence for almost 15 years.
This has allowed non-Chinese fund managers a form of
access to the Mainland markets through part ownership of
a local business.
It is arguable whether a JV FMC is necessary any longer. As
a means with which to get established in China and to build
knowledge and experience, there have been very mixed
reports from the market. Some have done very well. They
have allowed the local management of these businesses to
flourish and grow, they have often avoided having any direct
responsibility for the business, and as a result have seen
sometimes a good growth in assets under management.
There are others, who have wanted to be active participants
in the JV, who have found strong resistance locally, causing a
painful experience to be had by all.
With the advent of the “mutual recognition” scheme for
unit trusts and mutual funds, between Hong Kong and China,
it may well be that this will supersede the role of JV FMC
in time.
11
9. Costs?
a. Will you be setting up a sales and marketing office?
For a first step into Asia, this can often be the best choice for
a fund management business. It is simple, is “admin-lite” and
enables time to evaluate the full needs of the business as it
grows. It still requires a License from the local Regulator, it
also will likely involve the need to provide minimal services in
the event of transacting business. Another aspect to this is
to determine whether you plan to provide “retail” products,
or to be focused only on the “professional” market. Unlike
in some other parts of the world, it is possible to sell fund
management products and services to institutional investors
in most of Asia, provided they are not intended for use by
“retail-type” investors.
b. Setting a budget
Knowing how much you want to spend, or how much you are
willing to spend is a crucial aspect in setting up a new office.
While it would be good to provide some “ball park” figures,
these, by necessity, can vary enormously depending on what,
where and how you set up.
Hong Kong is no longer a “cheap” location. The costs of
living are among the highest worldwide. However, despite
this, many would consider Hong Kong also provides some of
the best value for money anywhere in the world also.
“Cost” Items to Consider when Setting Up a New Office in
Hong Kong
i. Legal fees
ii. Business registration fees
iii. Licensing fees
iv. Office expenses and service charges
v. Recruitment fees
vi. Salaries for staff
vii. Travel and housing expenses
viii. Product registration fees
ix. Translation fees
x. Technology
10. Administration, Back Office Support
Who are your existing suppliers of administration services?
Are they also operating a full suite of services in Asia and in
all locations?
Asia is home to virtually all the major banks, stock brokers,
and other providers of services to the asset management
industry. However, in many instances, these firms might
have a single office in either one major location or the other
(i.e. Hong Kong or Singapore) and then outsource to others
when it can’t provide itself. Thus, if you are managing assets
invested in say 5 or more Asian stock markets, depending
on your service provider, you might need to sub-contract
custody services to multiple providers, per market. Or, you
can choose a single provider that is in all the markets of the
region, although the list for that choice is very short.
a. What services do you require in Asia?
Most fund companies when coming to Asia for the first
time have little or no idea what exactly they need or want
in the way of services. Usually it is a matter of replicating
what has been done elsewhere. There is nothing wrong
with this approach, as it does mean that what is being
established conforms to whatever the people from Head
Office understand. There are times however, when not all
the range of services are needed, either on Day 1, or in the
foreseeable future. The key is to try to identify which of
these are needed and which are not.
Usual Range of Admin Services Required by
Fund Managers in Hong Kong
i. Middle and back office
ii. Valuations
iii. Reporting
iv. Custody
v. Transactions
vi.Forex
vii. Banking
viii. Collateral management
ix. Technology base
x.
Transfer agency
12
b. Are you looking for help from your service providers?
Of course you are! Help, in whatever form, is one of the
primary ingredients sought by any new entrant to the Asian
markets. This can be in one or more of many different ways.
Typical Areas of Assistance Required by Fund Managers
from Their Service Providers
i.
Which professional services firms, e.g. lawyers, accountants, compliance, etc. to use;
ii. Where should the office be located?
In dedicated space, a business centre, within the Central Business District, etc.
iii. Who are the key “gatekeepers” for the
primary distributors?
iv. Where to find suitable staff, which head-hunters
to use?
v. Who are the competitors against which to benchmark?
vi. In-source or out-source of administration services?
vii. Dealing remotely
viii. Distribution of products
ix. Introductions to institutional investors
x. Invitations to industry events
11. Competition
a. Who is the competition?
It is a statistic provided by the SFC, that 77 of the top 100
global asset management firms have established a presence
of some sort in Hong Kong. Without doubt, competition is
fierce. But this is true of almost anywhere in the world these
days, and it is certainly nothing to be frightened of. Not only
are global asset managers in Hong Kong, so also are many of
the leading Chinese-owned firms.
In the retail space, most of the usual names of top firms
are represented. They have been able to use their UCITS
products from Luxembourg or Dublin, to enter and grow a
market share of the mutual funds business on offer.
b. What do they do?
Most fund managers established for a number of years in
Hong Kong, have built a comprehensive business model
that seeks both retail and institutional business. Further,
they have often used Hong Kong as the base from which to
develop regional businesses in Singapore, Taiwan, China,
Korea, etc. Much depends on whether they have also built a
management capability, to manage Asian region assets for
their global clients.
12. What Else?
a. Dealing with Head Office
Dealing with Head Office has proven, over the years, to
be one of the most difficult of challenges faced by fund
managers setting up in Hong Kong. Quite apart from the
obvious time differences, a conference call involving Europe,
East and West Coast US and Australia can be impossible to
schedule. Likewise, managing the often inflated expectations
of senior management, once the business has been set up
requires great expertise.
b. Visiting fund managers, sales executives, and
their licensing?
Hong Kong has become a favorite place for fund managers to
stop off on trips around the world. They can call in to
meet with clients, update their colleagues on what is going
on within the funds they manage, and undertake some
marketing of their products. While most of this can be done
in the confines of their business premises, in the event of any
public marketing, such as seminars for retail investors, then
it is advisable to obtain a temporary license from the SFC for
the purpose. Usually this is quite straight forward,
and relatively quick to have processed.
Stewart Aldcroft
Senior Advisor, Investor Services, Asia Pacific
Citi Securities and Fund Services
13
Appendix
1. Components in Combined Fund Management Businesses
Components in Combined Fund Management Businesses
Note: The amount of assets under management by insurance companies has excluded those assets sub-contracted or
delegated to other licensed corporations/registered institutions in Hong Kong for management.
REITs: real estate
investment trusts
Combined fund management business
HK$12,587bn
LC: licensed corporations
RI: registered institutions
Market capitalization of REITs
HK$174bn
Non-REIT fund management business
HK$12,413bn
Asset management
business
HK$8,246bn
Other private
banking business
of RI
HK$2,679bn
IC: insurance companies
Fund advisory
business of LC
HK$1,488bn
LC
RI
IC (Note)
HK$7,690bn HK$198bn HK$358bn
Source: Hong Kong Securities and Futures Commission’s Fund Management Activities Survey 2012, July 2013
2. Licences
The below figures show the number of licenses issued by type. Many corporations and individuals will have
multiple license-types.
Licenses
Type 1
Type 4
Type 9
Corporations
934
872
892
Individuals
24,815
9,298
4,469
Responsible Officers
3,042
2,390
2,208
Source: Hong Kong Securities and Futures Commission, as at December 31, 2012
3. NAV of Authorised Funds by Type
Net Asset Value of Authorised Funds by Type (in US$ million). Number of Authorised Funds
Bond
Equity
Diversified
Money
Market
Fund of
Funds
Index
Guaranteed
Hedge
Others
Total
NAV
467,175 498,959
45,726
83,609
9,332
126,127
515
630
5,551
1,237,624
Number
338
82
39
72
124
14
5
16
1,660*
970
Source: Hong Kong Securities and Futures Commission, as at December 31, 2012
*The number of “umbrella structures” is 187, thus a total of 1,847 funds are authorized by the Hong Kong SFC.
14
4. Asset Management and Fund Advisory Business of Licensed Corporations
Asset Management and Fund Advisory Business of Licensed Corporations, Registered Institutions and Insurance
Companies (HK$9,734 billion)
Asset Management and Fund Advisory Business by Type of Funds (HK$ million)
12.3%
5.6%
30.4%
4.5%
Government funds
$1,195,756
Private client funds
$917,126
Pension funds
$544,413
SFC-authorized
retail funds
$1,709,200
MPF
$442,858
Institutional funds
$1,968,377
20.2%
Other funds
$2,955,932
17.6%
9.4%
Asset Management and Fund Advisory Business by Type of Funds 2012 vs 2011 (HK$ million)
2012
$1,968,377 (+29.5%)
Institutional
funds
$1,520,367
2011
$2,955,932 (+39.8%)
Other funds
$2,114,174
$1,709,200 (+30.2%)
SFC-authorized
retail funds
$1,312,808
$1,195,756 (+54.7%)
Government
funds
$773,060
$544,413 (+77.3%)
Pension funds
$307,036
$917,126 (+278.6%)
Private client
funds
$242,212
$442,858 (+16.0%)
MPF
$381,701
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Source: Hong Kong Securities and Futures Commission’s Fund Management Activities Survey 2012, July 2013
15
5. Asset Management Business (HK$8,246)
Asset Management Business (HK$8,246 billion) by Source of Funds
($ million)
Licensed corporations
Registered institutions
Insurance companies
Total
Hong Kong investors
(% of total)
2,592,907
(33.7%)
79,654
(40.2%)
298,800
(83.4%)
2,971,361
(36.0%)
Non-Hong Kong
investors (% of total)
5,096,511
(66.3%)
118,607
(59.8%)
59,462
(16.6%)
5,274,580
(64.0%)
Total
(100%)
7,689,418
(100%)
198,261
(100%)
358,262
(100%)
8,245,941
(100%)
Source: Hong Kong Securities and Futures Commission’s Fund Management Activities Survey 2012, July 2013
6. Assets Managed in Hong Kong (HK$5,707 billion)
Assets Managed in Hong Kong (HK$5,707 billion) by Geographical Distribution of Investments
Assets Managed in Hong Kong by Geographical Distribution of Investments (HK$ million)
1.4% 0.8%
6.6%
11.2%
53.6%
20.9%
Hong Kong and Mainland
$3,061,470
UK & Europe
$375,028
Japan
$313,372
Other regions
$82,167
Rest of Asia Pacific
(including Australia and
New Zealand)
$1,191,531
Non-identifiable
$47,370
North America
(USA and Canada)
$636,225
5.5%
Assets Managed in Hong Kong by Geographical Distribution of Investments 2012 vs 2011 (HK$ million)
$3,061,470 (+64.6%)
Hong Kong and
Mainland
$1,860,304
2011
$1,191,531 (+36.4%)
Rest of Asia Pacific (including
Australia and New Zealand)
2012
$873,497
$636,225 (+24.9%)
North America
(USA and Canada)
$509,521
$375,028 (+82.7%)
UK & Europe
$205,245
$313,372 (+18.5%)
Japan
$264,543
$82,167 (+48.4%)
Other regions
$55,350
$47,370 (-42.7%)
Non-identifiable
$82,718
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Source: Hong Kong Securities and Futures Commission’s Fund Management Activities Survey 2012, July 2013
16
7. Staff Profile in Fund Management Business
Staff Profile in Fund Management Business (Total number: 32,188)
Staff in Fund Management Business by Job Function
1.8% 2.6%
3.4%
4.8%
5.8%
7.3%
Fund administration
2,354
Research/Analysis
1,110
Sales and marketing
23,903
Asset management
1,534
Corporate planning and
business management
587
Others
1,864
Dealing and/or trading
836
74.3%
Staff in Fund Management Business by Job Function 2012 vs 2011
23,903 (+2.0%)
Sales and
marketing
23,441
2012
2011
2,354 (+12.6%)
Fund
administration
2,091
1,864 (+13.6%)
Others
1,641
1,534 (+8.7%)
Asset
management
1,411
1,110 (+1.3%)
Research/
Analysis
1,096
836 (+8.6%)
Dealing and/
or trading
770
Corporate planning
and business
management
587 (+4.6%)
561
0
5,000
10,000
15,000
20,000
25,000
30,000
Source: Hong Kong Securities and Futures Commission’s Fund Management Activities Survey 2012, July 2013
17
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