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Open-ended fund companies (OFCs) and limited partnership funds (LPFs) are two of the most popular investment vehicles in Hong Kong’s investment fund landscape. OFCs were introduced in 2018 and have gained popularity due to their flexibility and suitability for different types of investment strategies. OFCs are particularly well-suited for hedge funds and other alternative investment strategies, as they offer greater flexibility in terms of fund management and investor participation. LPFs, on the other hand, have been around for much longer and are commonly used for private equity and real estate investment. Both OFCs and LPFs are popular with international investors and fund managers, as Hong Kong offers a favourable regulatory and tax environment for investment funds. OFCs are regulated by the Securities and Futures Commission (SFC), while LPFs are registered with the Companies Registry and must comply with the Limited Partnership Fund Ordinance (LPFO), which is administered by the Company Registry (CR). This regulatory oversight helps ensure that investors are protected and that funds are managed in accordance with the law.
LPF vs OFC: Comparison of the key factors
| OFC | LPF | |
| Key Operators | Two Directors approved by SFC | Directors/General Partner |
| Investment Manager | Must delegate investment management to licensed or registered investment manager. | Appoint investment manager who can be the GP or another person |
| Custodian | Must entrust investment property to a custodian. | No requirement to appoint a custodian, but the GP must ensure proper asset custody. |
| Investment Restrictions | Cannot be for general commercial or industrial purposes. | No investment restrictions |
| Legal Personality | Has separate legal personality. | No separate legal personality, GP has unlimited liability |
| Liability | Shareholders not responsible for fund debts and liabilities. | Limited partners not liable beyond their agreed contribution, provided they don’t participate in fund management outside safe harbours. |
| Flexibility of Contract | Not as flexible, with restrictions on custodian and investment manager, termination and dissolution requirements, and corporate administrative matters. | Generally has freedom of contract with partners regarding fund operation |
| Post Establishment Changes | Several changes require SFC approval. | No approval needed for changes, but certain changes must be notified to Companies Registry |
| Regime | Must register and be approved by SFC. | Registration not compulsory under LPFO. |
| Approval time | Approximately one month, based on required document submission. | Takes approximately 3-4 weeks, depending on commercial considerations. |
Overview of Hong Kong’s Fund Unified Tax Exemption
| Details | |
| Exemption Eligibility | Funds must meet the definition of a fund under the IRO and be structured as an arrangement where contributions and profits are pooled |
| Control Requirements | Funds must not be under the day-to-day control of participating persons and must have a purpose to enable them to participate in profits |
| Qualifying Transactions | The exemption applies to profits earned from qualifying transactions, such as securities, futures contracts, and foreign currencies, which are specified in Schedule 16C to the IRO |
| Eligibility Conditions | Funds must meet certain conditions to qualify, such as having qualifying transactions carried out or arranged in Hong Kong by a licensed person or being a qualified investment fund with a certain number of independent investors and capital commitments |
| Incidental Transactions | Incidental transactions may also be eligible but are subject to certain limits on the trading receipts |
| OFC Exemption | An OFC may also be exempt from profits tax on transactions in non-schedule 16C assets if it meets the definition of a fund under the IRO |
| OFC Limitations | However, the exemption is not available to an OFC that carries on direct trading or business in non-schedule 16C assets or holds them to generate income |
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