Open-Ended Fund Companies (OFC) in Hong Kong: A Complete Guide for Fund Managers

Introduction: Hong Kong’s Corporate Fund Vehicle

The Open-Ended Fund Company (OFC) is a corporate fund structure introduced in Hong Kong in 2018 and significantly enhanced by the Securities and Futures (Amendment) Ordinance 2021. It enables fund managers to establish investment funds in Hong Kong using a corporate vehicle — an open-ended company structure with variable share capital — rather than a unit trust or overseas fund vehicle.

The OFC has gained considerable traction as part of Hong Kong’s strategy to develop its fund domiciliation market, with the number of registered OFCs growing substantially since the introduction of a government grant scheme and tax concessions. This guide provides a comprehensive overview of the OFC structure, its key features, the regulatory framework, and the tax incentives available.

Key Features of the OFC Structure

Variable Capital

Unlike a standard Hong Kong company incorporated under the Companies Ordinance (Cap. 622), an OFC has variable share capital: it can issue and redeem shares without the need for a solvency test, court approval, or reduction of capital procedures. This makes it suitable as an open-ended fund vehicle where investors subscribe and redeem on an ongoing basis.

Umbrella Structure with Sub-Funds

An OFC can be structured as an umbrella fund with multiple sub-funds, each with its own investment objective, assets, and liabilities. Sub-funds are legally segregated from each other — the assets of one sub-fund cannot be used to meet the liabilities of another. This is a significant advantage over certain offshore structures where segregation may be less robust.

Corporate Governance

An OFC must have at least two directors. For a privately offered OFC (see below), at least one director must be an SFC-licensed investment manager or a representative of one. For publicly offered OFCs, all directors must satisfy specific eligibility criteria.

Custodian Requirement

All OFCs — whether public or private — must appoint an independent custodian to safe-keep the OFC’s assets. The custodian must be a bank, a trust company, or another entity approved by the SFC.

Public vs. Private OFCs

OFCs are categorised as either publicly offered or privately offered (private OFCs).

Publicly Offered OFCs

A publicly offered OFC is authorised by the SFC for sale to the Hong Kong retail public. It must comply with the SFC’s Code on Unit Trusts and Mutual Funds (UT Code), including requirements on investment restrictions, valuation, disclosure, and ongoing reporting. Publicly offered OFCs are subject to the full SFC authorisation process and ongoing supervision.

Privately Offered OFCs (Private OFCs)

A private OFC is offered only to professional investors — as defined in the SFO — on a private placement basis and is not authorised for public offering. Private OFCs are registered with (rather than authorised by) the SFC. The regulatory requirements are lighter than for public OFCs, though private OFCs must still appoint an SFC-licensed investment manager and a custodian, and file annual returns with the SFC.

The private OFC has become the dominant vehicle in practice, particularly for alternative investment funds (hedge funds, private equity, family office vehicles).

The Investment Manager Requirement

All OFCs must appoint an investment manager that is licensed by the SFC for Type 9 (asset management) regulated activity. The investment manager may be the OFC’s promoter, an affiliated entity, or a third-party manager. For a private OFC with an offshore manager, it is possible to appoint a Hong Kong sub-manager (acting as the appointed investment manager) with the offshore manager acting as investment adviser.

Setting Up an OFC: Key Steps

1. Incorporation: Apply to the Companies Registry for incorporation of the OFC. The OFC is incorporated as a company limited by shares under the Companies Ordinance but governed by the Securities and Futures (Open-ended Fund Companies) Rules.
2. SFC Registration (Private OFC): File a registration application with the SFC. The SFC reviews the application and, if satisfied, registers the OFC and issues a registration number. Typical registration timeframe is 3–6 weeks.
3. Appointment of Service Providers: Appoint an SFC-licensed investment manager, a custodian, a fund administrator, and (typically) an auditor.
4. Offering Document: Prepare a prospectus or information memorandum (for private OFCs) setting out the investment strategy, fee structure, subscription/redemption terms, risk factors, and other disclosures.
5. Launch: Once all documentation is in place and service providers are appointed, the OFC can accept its first subscriptions.

Tax Concessions for OFCs

OFCs benefit from significant tax concessions in Hong Kong:

• Profits tax exemption: Private OFCs that meet the qualifying conditions are exempt from Hong Kong profits tax on qualifying transactions (as defined under the Inland Revenue Ordinance). The exemption covers income from shares, bonds, commodities, derivatives, and certain other financial instruments.
• Stamp duty exemption: OFCs are exempt from Hong Kong stamp duty on the transfer of shares in the OFC and (subject to conditions) on the transfer of certain assets to the OFC.
• OFC Grant Scheme: The Hong Kong government has periodically offered grant schemes to offset the setup costs of establishing OFCs in Hong Kong (the most recent scheme provided grants of up to HK$1 million per OFC). Check the HKMA and InvestHK websites for current availability.

Comparison: OFC vs. Cayman Islands Fund

The OFC was designed partly to compete with the Cayman Islands as a fund domicile for Asia-Pacific funds. Key comparative points:

• Tax: Both Cayman and Hong Kong OFCs offer effective tax exemptions for qualifying investment funds, though the specific conditions differ.
• Cost and speed: OFC registration is relatively fast (3–6 weeks for a private OFC) and government fees are modest. Cayman fund formation is well-established but can involve higher ongoing costs (registered office, annual fees).
• Substance: The OFC provides genuine Hong Kong substance (investment manager, custodian) which is increasingly valued in the context of global substance requirements and investor due diligence.
• Regulatory familiarity: Cayman funds are deeply familiar to institutional investors globally. OFCs are increasingly accepted but may require additional explanation for investors unfamiliar with the Hong Kong regime.

The OFC in Context: Family Offices and Private Wealth

The OFC has become a popular vehicle for family offices domiciling investment portfolios in Hong Kong. Combined with the Family Investment Holding Vehicle (FIHV) regime introduced under the Inland Revenue (Amendment) (Tax Concessions for Family-Owned Investment Holding Vehicles) Ordinance 2023, Hong Kong offers a comprehensive framework for family office structuring that is globally competitive.

Conclusion

The OFC is a mature, SFC-regulated, tax-efficient fund vehicle that is increasingly used by fund managers and family offices seeking to domicile or establish funds in Hong Kong. Its flexible umbrella structure, strong custodian and governance requirements, and meaningful tax concessions make it a compelling alternative to offshore structures for Asia-Pacific-focused investment activity.

Alan Wong LLP advises on OFC formation, SFC registration, fund documentation, and ongoing compliance for open-ended fund companies in Hong Kong. Contact us to discuss your fund structuring needs.