Author: Margie Lindsay; Source: Hedge Funds Review
With over 300 hedge fund managers and close to $70 billion in assets under management, Hong Kong is in the running to become the main centre for hedge fund management in Asia.
“More and more of what we are seeing today are not just flows of capital looking to support growth of the Chinese economy but the outcome of the outpouring of fund managers and others, and of money moving into Hong Kong looking for investment opportunities,” said Martin Wheatley, CEO of the Hong Kong’s regulator, the Securities and Futures Commission (SFC).
Hong Kong serves many purposes vis-à-vis China. Not only is it a testing ground for economic and financial innovations, it has long been a gateway to China. “Increasingly the movement of money has become a two-way flow. It is not just about money moving in one direction,” said Wheatley.
This is important for the development of the jurisdiction. As more of the world’s funds seek to increase their allocations to Asia and specifically to Hong Kong, the same is happening on the mainland where a flow of funds and expertise is coming out of mainland China.
Over the years Hong Kong has increasingly been a testing ground for economic and financial innovation from mainland China. More recently China has been experimenting with what Wheatley terms “hot and cold taps”. These are policy levers where if the market in the mainland over or under-heats, changes can be made to put things back into balance.
The cold tap is the qualified domestic institutional investor (QDII) schemes that allow money in the mainland to move out of China. A lot of this money has found its way into Hong Kong. The hot tap is the qualified foreign institutional investor (QFII), where the flow of money goes into Greater China. Both schemes have been evolving as a way of allowing mainland money to get exposure to overseas markets while allowing overseas investors to gain exposure to the mainland market.
Hedge fund managers are continuing to move into Hong Kong, attracted by the promise of access to China as well as seeing the territory as a good base to access regional markets.
“Ten years ago Hong Kong put in place a number of measures which have stood the test of the financial crisis better than the regulations of the US and Europe where there have been “huge, enormous and intrusive regulation of hedge funds”, noted Wheatley.
“There is always a problem when regulation is politicised,” he observed. “You get an odd outcome then. Regulation should be pragmatic. Regulators are really technocrats who take account of predictable outcomes. When they have to respond to political pressure, you get a different result,” commented Wheatley.
Hong Kong’s regulator has not had this problem. Because US and European Union politicians wanted a better understanding of leverage at fund level. They also want regulators to be able to intervene at the fund level if things look likely to go wrong.Hong Kong, said Wheatley, has not had to change significantly its existing rules. The regulation does not interfere at the manager level unless it is involved at the retail level.
The existing Hong Kong rules have always required the licensing of hedge fund managers if they are operating as securities businesses, confirmed Wheatley. All managers have opted for registration.
As a full member of International Organization of Securities Commissions (Iosco), the SFC envisages only minor changes to existing laws in order to carry out data collection surveys which require a set of information from hedge funds. “We are going through this data and analyzing it. I do not think additional reporting by hedge funds or more rules specifically for hedge funds will be needed in Hong Kong,” confirmed Wheatley.
One area Hong Kong may be looking at in future is the introduction of a regulatory structure to allow the formation of open-ended investment companies (Oeics). “We are looking into this and one or two other areas,” he said. For Oeics to be established, the SFC would need to look at both company law and tax regulation. “The introduction of Oeics is very complex and throws up a set of issues. We are at a relatively early stage in the process,” said Wheatley.
Meanwhile, Wheatley is happy to continue to see hedge fund managers setting up in Hong Kong using traditional Cayman Islands fund structures. “The traditional, conventional model – we’re comfortable with that. We don’t know if that will change. Our view is that if a hedge fund meets the threshold level of competency and integrity, it can set up in Hong Kong.”
The SFC’s stance on issues such as shorting coupled with its pragmatic approach to regulation will be seen by managers as two more plus points for moving to Hong Kong. It was the only jurisdiction that did not ban shorting at any time throughout the financial crisis.
Wheatley, who chairs the Iosco task force on short-selling, “hopes the outcome will be truly sensible in terms of short-selling regulations”. He believes shorting not only provides liquidity to the market but also helps ensure efficiency. He is not in favor of imposing restrictions. “The only changes we are making are along the lines of what Iosco will require,” he confirmed.
This mainly concerns position reporting.Like any hedge fund jurisdiction outside the EU, Wheatley is eyeing the repercussion of the alternative investment fund managers (AIFM) directive. “We may need to go through some processes here in Hong Kong. We have a system in place to regulate hedge fund managers and this works,” he notes.
Whatever the requirements the EU may impose on third countries, Wheatley is confident Hong Kong will be able to meet them. He confirmed the SFC is in “close dialogue” with EU regulators as well as those in the US and the UK. He expects to have a good relationship with the European Securities and Markets Authority (Esma) which comes into being in 2011.Wheatley hopes Hong Kong will become the centre for hedge fund managers and other asset management companies.
The jurisdiction is already moving in that direction, although it faces stiff competition from Singapore. Nevertheless, with the prospect of Greater China on its doorstep, Hong Kong is confident of its ability to continue to attract fund management companies and expects to continue to see yearly growth in the industry of around 20% for the next few years.
Martin Wheatley
Martin Wheatley was appointed as CEO of the Securities and Futures Commission (SFC) in Hong Kong in June 2006. His appointment expires on September 30, 2011.Wheatley is a member of the Financial Stability Board sub-committee on standards implementation, as well as the International Organization of Securities Commissions (Iosco) technical committee. Currently, Wheatley chairs the Iosco technical committee task force on short selling. Prior to joining the SAC, Wheatley was deputy chief executive of the London Stock Exchange.Wheatley was also chairman of the FTSE International and sat on the listing authority advisory committee of the UK Financial Services Authority (FSA).
