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Hong Kong Regulators Finalize Hedge Fund Guidelines

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HONG KONG (–Little will change in the guidelines drafted by the Hong Kong Securities and Futures Commission earlier this year, although the regulator did decide to clarify a few sections of its hedge fund offering rules.

Hedge fund managers wanting guidance on how much general money management experience is required before offering retail hedge funds in Hong Kong were granted their requests, while those wanting lower collateralization thresholds were denied leniency.

The commission revised its May consultation paper to say that they will take into account various factors in assessing a management firm’s experience. At least two key personnel in the company must have at least five years of relevant experience. In the case of funds of hedge funds, two key personnel will need to have at least two years of specific investment management experience.

The guidelines also specify what types of experience are acceptable for managers. For example, general experience acquired through academia, sales, marketing or back-office administration would not apply.

In reviewing recent market events, the commission also decided it wasn’t appropriate to raise the collateralization level for hedge fund managers. Capping collateralization at 100%, officials say that when the assets of a fund are charged to a prime broker for financing, the borrowed amount can not exceed the assets the fund has under management.

The SFC said its concern over collateralization stemmed from a wide range of regulatory issues such as conflicts of interest when prime brokers are forced to foreclose on a hedge fund and the impact on investors when collateral stipulations are lowered.

Officials also decided not to change the investment minimum for retail hedge fund offerings, although those responding to the SFC disagreed on whether the minimum should be lowered.

Those commenting from the retail sales perspective opposed the lowering of the investment minimum over fears that the investing public was not sophisticated enough to invest in hedge funds. Of those directly involved in the fund industry, they welcomed a lower threshold in order to expand the hedge fund industry in the region, SFC officials said.

For single hedge funds the investment minimum is set at US$50,000, while for funds of hedge funds minimums remain lower at US$10,000. And no minimum subscription level applies to a fund that carries a 100% capital guarantee.

SFC officials said that they would closely monitor market developments and fund manager conduct and at a later date may revisit the issues of investment minimums and collateralization.

In determining the final form of the hedge fund offering guidelines, the regulatory body had a number of discussions with respondents to clarify and better understand their submissions. Firms responding to the initial consultation paper include: Clifford Chance, Deacons, the Hong Kong Investment Funds Association, Linklaters (representing Citigroup Global Markets Asia Ltd., Goldman Sachs (Asia) LLC and UBS AG), SAIL Advisors Ltd. and Stewart Aldcroft/Noble Investments HK Ltd.

The hedge fund guidelines will become effective after their publication in the Hong Kong Government Gazette, which is expected at the end of this month.

Contact Bob Keane with questions or comments at [email protected].


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