The Secret Hong Kong and COVID-19 Share (and what it means for asset managers)
Hong Kong has offered a stable and welcoming environment to asset managers for more than 20 years, steadily building steam to emerge as a financial powerhouse behind New York and London.
With its business-friendly tax structure and position as a gateway to China, one of the world’s largest markets, this semi-autonomous region is home to more than 160 licensed banks and approximately 1,600 asset managers.1 It also boasts 420 hedge funds, accounting for nearly US $91 billion of assets under management, according to the Financial Times and based on data from Eurekahedge. That is higher than the combined amount managed by Singapore, Japan, and Australia.
Hong Kong has been able to attract top talent and financial investment thanks to a westernized lifestyle and relative freedoms. This is due to the “one country, two systems” framework that took effect in 1997 when Britain returned the former colony to China. The agreement gave Hong Kong relative autonomy for at least 50 years.
That came to an abrupt and premature end this year when Chinese President Xi Jinping implemented a new national security law at the end of June. The law is expected to draw Hong Kong closer to China’s stricter policies. It could threaten the control of capital, data privacy, freedom of speech and other civil liberties that Hong Kong has enjoyed as a semi-autonomous territory for the past 23 years. The law also stands to threaten Hong Kong’s hard-earned status as a global financial center.
A new door opens
For firms that want to establish a presence in Asia, the turmoil in Hong Kong has unlocked opportunities as other jurisdictions rush to step in.
Singapore, which has long-vied with Hong Kong for a slice of the financial pie, is poised to benefit most. Low taxes, a respected regulatory framework, easy access to Pan-Asia, and generous incentives for qualifying funds and fund managers have already made Singapore an attractive base for hedge funds, private equity firms and family offices.
Seizing what could be an opportunity, the Singapore government has stepped up its game. It recently introduced new tax incentives to encourage investment, hoping to siphon fund managers from Hong Kong as well as from popular “lightly-regulated” jurisdictions, including those facing headwinds, such as the Cayman Islands. (In February, the Cayman Islands was added to the E.U. tax-haven blacklist of non-cooperative jurisdictions.)
There are many tax incentives in the recently introduced Variable Capital Company (VCC) structure, which became available to investors in January. The corporate structure can be used for hedge funds, private equity, real estate, and other funds. It also offers options for wealth managers.
The ability to set up an umbrella sub-fund in addition to a standalone fund make the VCC particularly attractive. Another benefit is its eligibility for the U.S. ‘check-the-box’ election. For funds with U.S. investors, this allows a fund to be treated as transparent for the purposes of U.S. federal income tax.
A catalyst for change
Asset managers based in Hong Kong that are concerned about the territory’s future may find that now is a good time to relocate. However, completely uprooting your IT infrastructure, software and back-office operations can be extremely challenging if they are not robust enough to withstand change.
And this is where the events in Hong Kong and COVID-19 share a commonality. They are a reminder how important it is to be prepared for the unexpected so your firm can react quickly to adversity or to take advantage of new opportunities. In other words, the events in Hong Kong and the pandemic both serve as a catalyst for change, compelling firms to rethink their technology and operations.
The asset management industry has excelled at prioritizing spending to attract the best minds in the investment world. Unfortunately, many hedge funds, private equity firms and family offices have been less focused on allocating capital for operational resources.
COVID-19 exposed this weakness. Firms with automated, robust systems easily transitioned to remote operations – even from one jurisdiction to another – while firms heavily dependent on spreadsheets and manual processes or with legacy technology hit bumps in the road.
One CFO of a U.S.-based hedge fund credited earlier investment in systems and security with a seamless transition to remote operations. In fact, it was so seamless – without a blip in client service levels or business continuity – and is working so well that they have no intention of renewing the office lease, which is due to expire in the coming months. This will save the firm thousands of dollars per year in rent and ancillary costs like cleaning services, freeing up capital to invest in technology.
Whether you’re adjusting to the ‘new normal’ of the pandemic, relocating an office to a different jurisdiction, or establishing a presence in a new region, the right technology is your building block to success.
Start by assessing the flexibility of your existing technology stack and operating model. Are processes automated? Are disparate legacy systems chipping away at efficiency? Is the system scalable? Does it provide the agility to support customer needs?
If you’re in the market for a new accounting and reporting solution, look for a system that can deliver the resilience and responsiveness needed to adapt to changing circumstances. Specifically, it should:
- Automate processes to minimize spreadsheets and manual input
- Track and manage all asset classes and investment structures
- Let you easily change reporting and consolidation currencies
- Provide clients with 24/7 access to data and reports
- Offer the option for on-premise or cloud deployment
Whatever your motivation for change, FundCount can help. Our multicurrency accounting, investment analysis and reporting solution handles all assets and fund structures – including onshore and offshore funds – so your investments are never limited by geography. With FundCount, you can smoothly transition from one jurisdiction to another.
Contact us to learn how the right accounting system can dramatically improve the flexibility, resilience and responsiveness of your firm’s back-office operations.