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Following is a speech "Hong Kong as an Asset Management Hub - The Growing Hedge Fund Industry" by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Hong Kong: Hedge Fund Hub of Asia - Conference 2005 today (December 8):
Mr Lee, distinguished guests, ladies and gentlemen,
It gives me great pleasure to join you all at this important event co-organised by AIMA [Alternative Investment Management Association] and Courses & Seminars Limited. The theme of today's conference is "Hong Kong as a hedge fund hub of Asia". With hedge fund activities becoming increasingly active globally, the conference today provides a timely opportunity and platform for industry players and professionals to exchange views, on the prospects and opportunities of hedge fund development in Hong Kong, and the positioning of Hong Kong's hedge fund industry in Asia. As many of you are aware, the Government is committed to promoting and reinforcing Hong Kong as a leading asset management centre in Asia. With the increasing popularity of hedge funds, hedge funds activities are becoming an integral part of asset management strategy. In the next 10 minutes or so, I would like to give a brief overview of Hong Kong as an asset management hub and the recent development of hedge funds in Hong Kong.
Hong Kong as an asset management centre
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HSBC Chairman Sir John Bond once said, "Hong Kong has to position itself as the Switzerland of Asia". Switzerland is a successful asset management centre in Europe. We believe Hong Kong has what it takes to position itself as Asia's asset management centre. In many areas similar to Switzerland, our development as a major asset management centre in the world is premised on the following fundamental strengths, including:
* rule of law, supported by an independent judiciary;
* a free economy (indeed we are rated by the Heritage Foundation as the world's freest economy for the 11th consecutive year);
* a stable currency with no foreign exchange control;
* a well-established financial infrastructure and highly efficient financial industry;
* a low and simple tax regime;
* an efficient, professional corps with sophisticated skills and talents drawn from global markets.
Together, these factors help ensure a quality market with the depth and breadth that are attractive to international asset managers. In fact, Hong Kong's strengths have much appeal for international investors. Earlier in October this year, the World Investment Report released by the United Nations reported that Hong Kong ranked second as the most preferred destination for foreign direct investment in Asia, for the fourth consecutive year.
Many prominent business leaders have pointed out that the savings rate in Asia is high in comparison with many other places in the world. As an international financial centre situated at the heart of Asia, with the Mainland as our hinterland, Hong Kong is uniquely positioned to tap into these savings and develop into a world class asset management centre. Indeed, we are already a leading asset management centre in Asia.
The fund management activities surveys conducted by the Securities and Futures Commission in the past few years have shown that the growth of Hong Kong's asset management industry has been sizable. In 2004, Hong Kong's total asset management business, which includes asset management, advisory business and other private banking business, increased 23% over 2003 to HK$3,618 billion. Of the HK$3,618 billion, about HK$2,900 billion came from asset management and advisory business which represented an increase of about 100% over the corresponding figure in 2000.
Looking ahead, the potential for further expansion of Hong Kong's asset management business is substantial. With the increase in personal wealth, we have witnessed a higher demand from people from all walks of life, looking for a greater variety of investment tools to fulfil different investment objectives. For instance, the rapid economic growth in the Mainland has greatly expanded personal savings and thereby increasing demand for investment products. The Mainland authorities are progressively allowing funds and institutions, such as insurance companies and the National Social Security Fund, to invest overseas. Given our proximity, linguistic and cultural affinities, the increasingly close economic cooperation between the Mainland and Hong Kong, combined with the pillars of Hong Kong's success, we are best placed to serve as the preferred asset management centre for the Mainland. We will make the most of our fundamental strengths and capitalise on the opportunities presented by the economic growth in the Mainland and the rest of Asia.
To support the asset management industry, we are committed to providing an environment conducive to its development. Last month, the Legislative Council passed the Revenue (Abolition of Estate Duty) Bill 2005. The key objective of abolishing estate duty is to facilitate the further development of Hong Kong as a leading asset management centre in Asia. Before abolition, estates worth HK$7.5 million or above attracted estate duty rates from 5% to 15%. With the passage of the bill, we are confident that more local and overseas investors will be attracted to hold assets here. This also means more business and employment opportunities for the industry. The ordinance will commence operation on February 11, 2006, with retrospective effect from 15 July 2005 applicable to estates of persons who passed away between July 15, 2005 and February 10, 2006. The Government will embark on a series of promotion activities, locally and overseas, to publicise the competitiveness of Hong Kong as an asset management centre. We cannot do this alone and would like to appeal for your support by spreading the news to your clients and business partners.
Another initiative to attract more global fund houses and professionals to come to Hong Kong and make use of our asset management services is the exemption of offshore funds from profits tax. Under the proposal, offshore funds would be exempted from tax for profits derived from specified transactions in Hong Kong. "Offshore funds" include non-resident entities, which can be individuals, partnerships, trustees of trust estates or corporations. The scope of "specified transactions" covers those transactions an offshore fund would typically perform in Hong Kong, including dealings in securities, dealings in futures contracts and foreign exchange trading. To qualify for the exemption, the "specified transactions" must be carried out by specified persons, which are corporations and authorised financial institutions licensed or registered respectively under the Securities and Futures Ordinance.
If the proposal to exempt offshore funds from profits tax is implemented, Hong Kong's tax treatment of offshore funds will be on a par with, or even more favourable than, other international finance centres such as the US, the UK and Singapore. The Legislative Council is currently scrutinising the bill and we hope to have it passed as soon as possible.
The hedge fund industry
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Let me now turn to the development of hedge funds. According to Van Hedge Fund Advisors International, assets under management (AUM) in the global hedge fund industry doubled from US$480 billion in 1999 to well over US$1 trillion in end-September 2005. Although the aggregate size of hedge fund assets is still relatively small compared with assets managed under traditional funds, the increasing interest in hedge funds from fund houses and institutional investors will likely sustain the growth and narrow the difference.
Previously offered as unregulated products to a limited number of wealthy, financially sophisticated investors, hedge funds were considered to be highly sophisticated and professional products. As hedge funds become more and more popular at the turn of this century, they are no longer "monopolised" by institutional investors and high net worth individuals. The veil of secrecy is gradually lifted. Hedge funds adopt an active management style to hedge market risks by utilising different investment strategies like hedging, short selling, leverage and arbitrage, and by investing in a wide variety of financial instruments. This explains why they are also referred to as "alternative investments".
Highly versatile, hedge funds are capable of generating high returns regardless of market directions. They contribute significantly to the efficiency of financial markets in a number of ways. For instance, they play a valuable arbitrage role in reducing or eliminating mis-pricing in financial markets. They are also an important source of liquidity, risk transferring and diversification. Nevertheless, there is a Chinese saying "°wµL¨âÀY§Q" - a needle is not sharp at both ends. The capability of hedge funds in achieving higher and quicker returns is accompanied by higher associated risks. Another key element of hedge funds is the power of leverage. While the use of leverage can produce returns in no time, it has the same power of multiplying losses in the blink of an eye. There are also concerns about the potential systemic risks and impact posed by hedge funds on market dynamics due to collective leverage and more active trading strategies. For example, the rise in non-commercial net long positions in crude oil futures a few months ago suggested that speculators had a role to play in driving up oil prices. With these concerns, regulators in major jurisdictions have been adopting a relatively cautious stance towards hedge funds.
Despite concerns about hedge funds on market volatility, it is an undeniable fact and something not to be overlooked that hedge funds have experienced phenomenal growth in the past five years and are becoming more and more popular. This has led institutional investors, for example, life insurance companies and pension funds, to allocate more money to hedge funds for greater investment returns. Between 1998 and 2004, the number of hedge funds more than doubled to 7000 with AUM more than quadrupled to US$1.3 trillion. Analysts expect assets managed by hedge funds to reach US$4 trillion by 2010. In Asia, the industry increased from 162 funds managing US$14 billion in 2001 to over 500 funds managing US$67 billion in 2004.
In Hong Kong, although the history of hedge funds is relatively short, Hong Kong was in fact one of the very first jurisdictions in the world to allow the sale of hedge funds to the retail public. While we welcome hedge funds to come to Hong Kong, investors' interest always comes first. In order to protect investors and uphold the efficiency, effectiveness and stability of Hong Kong's financial system, hedge funds intended for sale to the retail public in Hong Kong are required to be authorised by SFC and comply with specific requirements in accordance with the hedge funds guidelines issued by the SFC in 2002.
As at end 2004, there were an estimated 113 hedge funds operating in Hong Kong with total AUM amounted to US$12.4 billion. Of these, 13 (about 11.5%) were retail hedge funds authorised by the SFC with aggregate net asset size of US$1.2 billion, which was more than seven times increase in asset size from 2002 to 2004. The majority of the authorised hedge funds had a fund size of less than US$100 million each, while the biggest fund amounted to more than US$500 million. Out of the 13 SFC-authorised hedge funds, 6 are managed by SFC licensed managers, covering about 70% or US$830 million of the total AUM of all authorised hedge funds.
While there may be risks associated with hedge funds, provided there are adequate structural safeguards, proper disclosure requirements and good understanding of the nature and risks of hedge funds by investors, investors should be given a wider choice of products. In this connection, the SFC regularly reviews the hedge funds guidelines taking into account latest market developments. Earlier this year, the guidelines were revised to strengthen the assessment criteria for hedge funds managers and disclosure requirement in relation to the operation of the funds. The SFC will also continue with its education efforts with a view to enhancing investors' understanding of the nature and risks of hedge funds vis-ˆj-vis traditional funds. On the other hand, financial intermediaries also have a responsibility to advise their clients whether high-risks products are suitable for them.
Today's financial markets are developing fast, both in terms of magnitude and diversification. We need to maintain the competitiveness of our fund industry and constantly review the relevant policies with reference to international development and practice. The Government, together with SFC as the regulator, will continue to keep our fingers on the pulse of the international markets and review our policies to catch up with market needs.
Ladies and gentlemen, I do not wish to take up any more of your time. I understand that Martin, Chairman of the SFC, as well as Alexa Lam, his Executive Director, will also be speaking at this Conference. I am sure they will provide further details and insights regarding the development of the funds business in Hong Kong.
I wish you all a very successful conference.
Ends/Thursday, December 8, 2005
Issued at HKT 11:16
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