Hong Kong Should Sharpen Asset Management Sector's Competitiveness – Report

Tom Burroughes

2 January 2024

Hong Kong’s government should be clearer about the incentives to encourage its asset management centre, the Alternative Investment Management Association has said.

The administration should, for instance, give more guidance on how the Unified Fund Exemption regime should work, AIMA said in a report produced in conjunction with KPMG. The study is called Action Plan for Alternatives: Strengthening Hong Kong’s status as Asia’s leading hub for alternative assets.

“With more than HK$35 trillion ($4.48 trillion) in assets under management, and home to the biggest concentration of investment professionals in the region, Hong Kong is well positioned as Asia’s leading asset management hub and we believe that Hong Kong’s alternatives sector has a bright future ahead. However, if it is to continue to grow and thrive, it cannot be complacent,” Darren Bowdern, head of alternative investments, Hong Kong, KPMG China, said.

“We believe that these issues can be remedied by some important reforms to the tax regimes and a more accommodating licensing regime that will attract alternative asset managers to manage more funds and use more structures in Hong Kong,” he said.

The report comes at a time when Hong Kong wants to compete more effectively against rival financial hubs such as Singapore as a place to host alternative investment funds and family offices. In June, Hong Kong's government unveiled its “Network of Family Office Service Providers.” The rollout of the network is one of eight initiatives in the government's Policy Statement on Developing Family Office Businesses in Hong Kong, announced on 24 March this year.

Michael Bugel, managing director, co-head of APAC, AIMA added: “As investors' appetites evolve, so too must Hong Kong's regulatory frameworks to ensure that the flourishing alternative asset class continues to find a competitive and robust home in Hong Kong. Through modernising Hong Kong’s tax regimes for carried interest and investment funds, we believe the city can compete more effectively and retain its allure as an alternative investment management location in Asia, especially in the post-Covid landscape.”

In its 2023 budget, Hong Kong’s government said it would review the existing tax concession measures applicable to funds and carried interest. The report noted that for funds to consider using Hong Kong as a management and investment holding jurisdiction for their investments in the region, it needs to be very clear and certain that the gains made on such investment holdings do not suffer any further incidence of tax in Hong Kong upon repatriation of such gains to the fund investors.

AIMA and KPMG said that the “Carried Interest Tax Concession” has been a “rather contentious” issue in Hong Kong, arising from the difference between the industry’s views of carried interest compared with that of the Inland Revenue Department, and needs to be addressed.

“The government would benefit from making reforms to the UFE regime by providing more certainty of the tax exemption for investments managed from Hong Kong, as while the UFE provides a clear exemption for public or retail funds and most hedge funds, it is less clear for other asset classes,” AIMA and KPMG said. “Having a list of investments, such as property, that do not qualify as exempt would provide more clarity and certainty. The government could make it clear that interest and other returns for private credit and debt funds fall within the UFE regime.”

The organisations said that Hong Kong’s Securities and Futures Commission could “streamline the licensing process for private funds and other similar alternative asset managers.”

KPMG and AIMA also recommend the government to include investments in Open-ended Fund Companies (OFCs) and Limited Partnership Funds (LPF) in the new Capital Investment Entrant Scheme. This will boost the private funds industry and encourage the establishment of such vehicles in Hong Kong as well as their management entities, AIMA and KPMG said.