According to a report in Global Fund News, a news and market intelligence portal for the international mutual fund industry, fund houses in Hong Kong are becoming frustrated by the increasing sales of non-authorised funds by Independent Financial Advisors (IFAs) in the SAR, who they say on average are deriving more than 50% of their revenues from such products. Now the Hong Kong Investment Funds Association (HKIFA) is to formally look into the issue.
Sally Wong, senior executive manager at HKIFA, said that the organisation was considering what action to take in response to claims that most non-authorised products, such as hedge funds, pay trail commissions and performance fees much higher than mutual funds, leading independent financial advisers (IFAs) to heavily promote the products. Mutual fund managers say such a practice keeps the mainstream fund industry from fully tapping the IFA channel.
A major grievance on the part of mutual fund providers is that they pay to register mutual funds with Hong Kong's Securities and Futures Commission, while managers of non-authorised hedge and alternative investments are not required to do so. Global Fund News quoted Steward Aldcroft, managing director at Investec Asset Management Asia, which has 38 SFC-authorised funds, as saying: 'The frustration is that we pay substantial fees to the SFC for getting our funds authorised, a lot of money to get our fund prices quoted in two newspapers, and pay to keep the HKIFA alive and working.
In stark contrast to mutual funds, only one hedge fund, ED&F Man Investment Products' AHL Diversified Futures Ltd, is authorised for sale in Hong Kong. Non-authorised funds are not to be sold or advertised to the public according to Hong Kong's Protection of Investors Ordinance. However, investors who actually ask a distributor for alternative investment products, such as hedge funds, may well find themselves being offered numerous products.
According to investment managers in Hong Kong, the territory has seen a significant increase in interest in alternative investment products and hedge funds. Hong Kong IFAs are said to be discovering a niche for themselves in hedge and alternative investment products, in a market where banks rule the distribution business. Ada Mak, director at Merrill Lynch Investment Managers, said: 'They've found a specialisation along the product structure. In absence of a complex personal tax structure in Hong Kong that investors need IFAs to help them out with, IFAs need to offer specialised products such as hedge funds to clients for relationship retention.'
It could be that the Securities and Futures Commission will authorise hedge funds in the future, but has not commented on the issue except to say that the regulatory body in principle welcomes the introduction of new products and services provided that they meet the regulatory requirements in giving adequate protection to investors.
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