The future of funds – opportunities for fund managers in 2025
As global investors look for where the next areas of growth will land, we see continued progress in Hong Kong and its funds industry. The city operates in an “open market” system that allows global fund managers to operate and compete with local names without significant restrictions. Three key areas of development within the funds industry have emerged, capturing a USD351 billion market.
eMPF is the centralised scheme administrative system designed to provide greater flexibility and reduce overall costs for members by offering access to a broader range of approved funds. Instead of being limited to a single provider’s offerings, members will be able to choose from up to 400 approved funds. As of mid-2024, the Mandatory Provident Fund (MPF) had 12 scheme trustees, offering more than 370 different fund choices to 4.7 million MPF scheme members, with a total market size of more than HKD1.1 trillion (USD151 billion). By the end of 2025, all MPF accounts will transition into the new electronic platform, substantially increasing opportunities for fund managers to have their products selected.
For fund managers that currently do not have their fund products included in the MPF regime, this represents a new opportunity to tap into the USD160 billion market for long-term savings, by creating new funds or convert existing funds, that meet the MPF regulatory and compliance requirements. Until now, market entry has required providers to create retirement schemes with all the administrative chores that implies. With the launch of the eMPF Platform, it is now possible for fund management companies to participate by simply offering their funds alone. For managers not currently offering products in the MPF space, this is a great new opportunity. They will need to work closely with experienced local service providers such as Standard Chartered to ensure they have the right set up.
Typically, a fund is required to meet the following minimum standards in order to be approved within the MPF system:
Is set up and domiciled in Hong Kong
Has a MPFA approved trustee (based in Hong Kong) and investment manager
Is invested into approved securities markets, locally or globally, directly or via underlying funds
Is denominated in Hong Kong dollars
While the MPF offers over 370 fund choices, certain sectors remain underrepresented. For example, High Yield Fixed Income products are popular in the retail market but have limited availability in the MPF space. “Decumulation” funds which are popular in many Western markets and allows retirees to “draw down” on their accumulated assets, may present another opportunity for fund managers, as there are few of such funds in Hong Kong to date.
The Mutual Recognition of Funds (MRF) scheme, established almost 10 years ago, allows cross-border sales of mutual funds between Hong Kong and China, enabling retail investors in each jurisdiction to access approved funds.
A key initiative under the “Connect Schemes” is the Wealth Management Connect (WMC), which was launched almost three years ago, that allows sale of non-complex funds approved and domiciled in Hong Kong to the 75 million residents of the Greater Bay Area (GBA) of China.
While both MRF and WMC initially saw slow adoption, significant updates in 2024 aim to reduce restrictions and broaden their reach. Changes to the MRF will make it more attractive across all of China, while WMC has gained momentum as more retail investors in the GBA become familiar with the available products. Hong Kong banks have embraced WMC, partnering with Mainland banks to offer advice and services to Chinese customers.
With both MRF and WMC, there are several common features that apply to enable them to be eligible for use in either or both schemes. For global fund managers wishing to participate, they will need to consider very carefully how their business model in Hong Kong may enable them to offer products.
Typically, fund products will need to follow the following restrictions to be eligible for inclusion in either or both schemes:
Set up and domiciled in Hong Kong
Has a Hong Kong trustee acceptable to the Hong Kong Securities and Futures Commission (HK SFC) and local investment manager
Invested into approved securities markets locally or globally
Products must have no greater than a medium-high risk rating and not invest in single country emerging markets
All products offered must be authorised by the HK SFC
Hong Kong investment managers rarely have the ability and experience to directly manage funds invested in Europe or American markets. However, it is possible for “feeder funds” that could invest directly into funds that themselves are invested into European, American or other global securities markets , be set up and authorised by the HK SFC and be eligible in the WMC scheme. This opens a whole realm of possibilities for fund managers willing to create domestic products in Hong Kong.
Open-ended fund companies (OFCs) have gained traction across the Asia-Pacific region, driven by regulatory changes in places like Hong Kong, Australia, and Singapore. The success of UCITS products coming out of Luxembourg and Ireland, which provide cross-border funds access to global securities markets, has fueled this interest. UCITS now represent a USD6 trillion market across 60 countries and locations, accounting for over 70% of retail fund sales in Hong Kong and Singapore, and are trusted by investors worldwide.
Recognising the importance of this development, the Hong Kong SFC started to approve OFCs in 2019. The Hong Kong Government also offers up to 70% sponsorship of the initial set-up costs. This makes creating these products very cost-effective, and suitable for all types of funds and fund managers.
An OFC can be set up by businesses as wide-ranging as exchange traded funds, mutual funds, family offices, private equity, hedge and alternatives managers. It is also possible for existing mutual funds domiciled in overseas locations, to be redomiciled in Hong Kong and converted into OFCs.
To ensure a level playing field, OFCs have an identical tax treatment in Hong Kong to that of authorised funds, thus there is no income, profits or capital gains taxes applicable of the funds themselves.
Fund managers interested in setting up an OFC or redomiciling an existing fund, should engage with key service providers, such as custodians, fiduciary or trustee providers, as well as those that can provide fund accounting or administration arrangements. Many of these services are now available through “one-stop-shop” arrangement from established providers such as Standard Chartered, offering extensive local expertise.
In summary, the Hong Kong fund landscape offers significant growth opportunities for global fund managers, driven by three key developments:
The eMPF platform which is expected to streamline the MPF system and provider greater fund choices to its members
Cross-border initiatives such as the Wealth Management Connect (WMC) and Mutual Recognition of Funds (MRF) scheme enabling Hong Kong-domiciled funds to access the Greater Bay Area and broader Chinese markets
The introduction of open-ended fund companies (OFCs) that provide a flexible, tax-efficient structure for fund managers
