Hong Kong Tax, Hedge Fund Reform Plan Could Be Boon For City

Jun 3 2013 | 10:58am ET

Hong Kong is set to solidify its status as Asia's alternative investments capital with a new low-tax regime.

Financial Secretary John Tsang Chun-wah's plan to extend a 2006 tax exemption for offshore hedge funds to private equity funds, and plans to allow hedge funds to become companies, rather than trusts, should entice some of the roughly 1,400 Hong Kong hedge funds domiciled abroad to re-domicile in the Chinese territory, Philip Tye, head of the Alternative Investment Management Association's Hong Kong branch, said.

Those proposed changes, along with growing interest in China and the growing popularity of the mainland's currency, the yuan, will drive the growth, Tye told the South China Morning Post.

"The government reform plans, as well as the internationalization of the yuan, are going to make Hong Kong more attractive to many hedge funds," Tye said. "Hong Kong has always been an ideal distribution center for fund managers to sell their fund products to Asian investors. The proposed reform plans would now make Hong Kong more attractive for fund companies to domicile their funds here."

Only about 3,000 of Hong Kong's roughly 1,700 hedge funds are domiciled in the special administrative region, with most of the rest domiciled in Dublin, Ireland, or Luxembourg.

The extension of the tax exemption to private-equity funds could have a similarly big impact. According to Hong Kong Venture Capital and Private Equity Association Vice Chairman John Levack, the changes could double the number of Hong Kong-based private-equity firms.

"Hong Kong is an excellent center for private equity operation, but without structural reforms, growth will be limited," he told the SCMP.

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