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Introduction
Among the repertoire of investment fund structures that any investment fund manager should be considering, Asian-Pacific fund structures should clearly not be excluded from their scope. With increasing anti-money laundering and taxation regulations, fund managers are realising that purely offshore vehicles may not be ideal, especially with increasing corporate governance scrutiny and sustainability concerns, not just at the fund level, but at the level of stakeholders and investors as well.
Among Asian-Pacific fund structures, Australia first explored a new funds structure in 2022, known as the corporate collective investment vehicle (CCIV). This structure allows sub-funds to create a stand-alone investment vehicle separate from the Australian corporation which would have specific fund characteristics, including the ability to create sub-funds. However, its attractiveness has been limited by its more restrictive requirements compared to the “light touch regulation” already afforded by the existing Australian managed investment scheme (Australia’s other investment fund structure) (MIS). These include the requirement for registration with the Australian Securities and Investments Commission, the requirement for a corporate director that must meet certain restrictive compliance requirements, more rigorous filing requirements and potential additional liabilities as external administration of a CCIV on winding-up occurs on a sub-fund by sub-fund basis.
Meanwhile, the fund structures pioneered by Hong Kong and Singapore seem more innovative. The Singapore Variable Capital Company (VCC), introduced under the Variable Capital Companies Act on 14 January 2020, was intended by the Monetary Authority of Singapore (MAS) to address the real or perceived shortcomings of its offshore predecessors and to create a fund structuring regime that addresses the wish lists of Asian fund managers. Meanwhile, Hong Kong’s investment fund structure, the Open-ended Fund Company (OFC), was introduced on 30 July 2018 under the Securities and Futures Ordinance for similar reasons. Hong Kong also provided for another type of fund vehicle, the limited partnership fund (LPF) under the Limited Partnership Fund Ordinance (Cap. 637), in 2020, which envisions generally similar treatment as the OFC in Hong Kong (with notable exceptions set out herein) and therefore, will not be separately considered here.
With such potent Asian alternatives to Western/ offshore fund structures, how does an investment manager, particularly one that is Asia-based, operated, and focused on Asian investors, determine the best fund structure to utilise? Is there even such a thing?
The Singapore VCC and the Hong Kong OFC (“Asian Fund Structures”) as compared to traditional fund structures
Some of the biggest issues faced by Asian fund managers in Asia in dealing with European or other non-Asian funds domiciles are time differences, lack of familiarity with local market, customs and practices and need to conform Asian funds to fit Western structures and expectations, all of which ultimately lead to greater costs.
Like all of the well-known and incumbent fund formation domiciles, these Asian Fund Structures incorporate most of the Ideal Attributes necessary for a useful investment fund structure in Asia, aided by the fact that both Singapore and Hong Kong are English common law jurisdictions where English is the working language.
Hong Kong - Under the OFC regime, funds may now be established in Hong Kong under a corporate variable capital structure, unlike Hong Kong companies which would be subject to the restrictive capital structure required under the Companies Ordinance, or retail Hong Kong funds which must be established as unit trusts. Fund managers domiciling funds under the OFC in Hong Kong should, in theory, benefit from the territory’s long-established fund management industry and its access to China, as well as a special profit tax exemption for onshore private OFCs.
Singapore - The Singapore VCC provides fund managers with a structure that can, among other things, have a flexible capital structure, enable dividends to be paid out of capital, and be used for umbrella fund segregated portfolio strategies.
However, what make the Asian Fund Structures stand out from other existing investment fund structures are a few key characteristics that none of the fund structures from the traditionally favoured jurisdictions for investment funds, i.e., Luxembourg, Ireland and the Cayman Islands, (“Traditional Fund Structures") can easily address or replicate and which, under the right circumstances, merit serious consideration for a fund manager with specific needs.
Location – greater access to Asian markets and familiarity with Asian investors
In 2014, Asia overtook Europe and North America as the world’s largest investor region with US$440 billion invested1 and in 2018, the Asia-Pacific became the largest destination and source of foreign direct investment globally.2 As of early 2024, Hong Kong currently holds the second largest number of billionaires in the world.3 Hong Kong and Singapore are both centrally located in the Asia-Pacific region and provide an Asian domicile for an Asian-Pacific fund investor base. Both Hong Kong and Singapore are also already familiar to and with Asian investors with existing funds service providers who are grounded in Hong Kong, Singapore and Asian laws, business practices and customs.
As Asian wealth grows, truly Asian institutional investors are not hindered by legacy requirements to invest only in a UCITS structure. In any event, UCITS appear to be popular only in some Asian jurisdictions like Singapore, Hong Kong and Taiwan but are significantly less so in Japan and South Korea4, while key Asian-Pacific markets like the PRC, India, Indonesia and Australia do not recognise them at all. Malaysia and Thailand all require locally registered feeder funds. Even where UCITS are accepted for sale, such as in Taiwan or Japan, the process to obtain approvals is slow and expensive5.
As Asia becomes more and more sophisticated, this would appear to be a good time for the adoption of an “Asian” fund regulatory regime based on globally accepted standards in the centre of Asia. Having more layers of regulatory approvals than is absolutely necessary will add to time and cost issues as described below (see Cost & Time Savings) which, in these days of immediacy, is not palatable.
Since many large global fund managers are already doing business indirectly in Asia, either through a sub-advisory arrangement, a local acquisition or an offshore distribution, it is not too much of a stretch to set up an office in Hong Kong or Singapore to manage the Asian Fund Structure.
Gaining efficiencies - cost & time savings
A fund (whether public or private) needs to have a sufficiently large asset base to justify the high costs of utilising a regulated structure such as a UCITS or Cayman fund. Increasingly, Asian investors with the necessary size of funds to influence fund managers’ decisions are now questioning the need to pay high administrative fees to import a structure developed for another jurisdiction, such as an Irish UCITS in Europe – this is clearly demonstrated in the changing (and reducing) proportion of UCITS funds in Hong Kong.
Utilising a structure domiciled in one country, regulated by another, and marketed in a third implies that there are potentially at least three (if not more) different layers of regulatory compliance. This naturally leads to increased costs, time and differences in expectations compared to dealing with just one domicile.
Setting up a fund in Luxembourg requires the fund’s promoter or fund manager to approach the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier (CSSF) for UCITS approval up to six months prior to the fund’s launch date; in Ireland, approval from the Central Bank of Ireland (CBI) takes a minimum of six to eight weeks. Only after that approval is obtained can the fund’s promoters/managers take the necessary steps to obtain authorisation in the Asian markets whose investors they wish to target, a process that can be just as long as the initial UCITS approval.
Even after those approvals are obtained, every time any change occurs, all regulators have to be notified. Documentation approved by one regulator will need to be approved again by each of the other regulators. If they require changes, those changes need to be re-approved again by the "home" regulator, even if it is only a minor amendment.
Then there are the costs associated with the numerous appointments required by regulators as a result of this layered structure, some of which are duplicative – a UCITS fund registered in Hong Kong would require local service providers in Ireland, local representatives for Hong Kong, the UCITS-required trustees, custodians, depositaries, paying agents and/or administrators, lawyers, auditors and advisers in both Europe and Hong Kong. In short, instead of having to satisfy the requirements of one body, you will need to satisfy the regulators in every jurisdiction where you are authorised. European regulators, meanwhile, only work on European time which means loss of valuable hours in the process of agreeing amendments which, of course, leads to delays and potentially increased costs.
But what if the fund, the fund manager and the service providers could all be located in the same jurisdiction? Hong Kong’s OFC and Singapore’s VCC offer this as a matter of fact as well as the numerous tax incentives for fund structures (see below). Some of the UCITS-required appointments are either not required for the OFC or VCC or noticeably, more cost-effective if provided in Asia than in the West. If there is no need to cater for a European audience, Asian Fund Structures, being on Asian time and based on Asian costs, should be much more cost-effective, even if it were marketed in other Asian jurisdictions as arguably, any distribution to investors outside the Asian Fund Structures’ home domiciles would generally be to institutional investors to whom various private placement exemptions would apply and even if not, few Asian jurisdictions, if any, dictate the management of the fund to the extent of the UCITS regime.
On another note, registration and service fees and disbursements tend to be higher in the West.
Reduction in tax and regulatory barriers
Although Hong Kong and Singapore may not be tax-free, they offer some of the lowest corporate income tax rates in the world as well as various tax incentives which put together, in an era of CRS reporting and ESR compliance, make them very attractive.
Singapore has an extensive tax treaty network with over 80 territories while Hong Kong has tax treaty arrangements with 51 jurisdictions as well as a special relationship with China through its status as a special administrative region. This means, in both cases, that taxpayers engaged in cross-border businesses can enjoy certainty on tax, benefit from the elimination of double taxation and gain access to a common law platform to settle tax disputes. Acknowledging that the utility of offshore jurisdictions may be affected as a result of the economic substance requirements imposed by BEPS Action 5, using a Hong Kong or Singapore vehicle, such as the VCC, affords immediate access to tax benefits in a jurisdiction that is free of the negative perception of some offshore jurisdictions.
Generally, funds (whether onshore or offshore) which are managed by a Hong Kong or Singapore-based fund manager on a discretionary basis may be subject to tax in Hong Kong or Singapore by virtue of the activities of the fund manager in managing the investments of the fund. As a result, income and gains derived by the fund may be deemed to be sourced in and therefore, liable to local tax (currently corporate income tax is set at 16.5% in Hong Kong and 17% in Singapore).
Grant schemes on offer
The Singapore government, in its goal of establishing Singapore as a regional fund management centre, has introduced numerous tax incentive schemes as sweeteners to attract the fund management industry. These incentives extend to, and in some cases are specific to, the VCC structure. Provided the necessary conditions can be met, they can reduce or even eliminate the tax liability for such funds.
Among other things, eligible VCC funds may qualify for tax exemptions and schemes, such as the Singapore partial tax exemption or start-up tax exemption schemes and may also potentially claim GST (goods and services tax) remission on its expenses (the variable capital companies grant scheme specifically for VCCs ended on 15 January 2025). Its investors may also enjoy zero-rated tax relief in respect of gains arising from disposal, dividend income and/or interest income from approved portfolio holdings. The tax incentives/savings enjoyed ultimately depend on how the fund is structured under certain investment fund tax incentive schemes – the 13D Offshore Fund Tax Exemption Scheme, the 13O Onshore Fund Tax Exemption Scheme, the 13U Enhanced Tier Fund Scheme and the section 13H Scheme (after the relevant sections of the Singapore Income Tax Act).
Singapore has also encouraged service providers to such VCC funds, such as fund managers, to be based in Singapore. Under the Singapore Fund Management Incentive, they may enjoy tax relief at a concessionary rate of 5% for a period of up to 5 years albeit renewable, in respect of management and performance fees. Ultimately, this will translate to lower costs – directly for fund managers, and indirectly for the fund and its investors.
Meanwhile, Hong Kong has its Grant Scheme for Open-ended Fund Companies and Real Estate Investment Trusts which defrays up to 70% of the eligible expenses in relation to the OFCs, subject to: (i) a cap of HK$1 million per public OFC; (ii) a cap of HK$500,000 per private OFC; and (iii) a maximum of three OFCs per investment manager. This does not, however, apply to LPFs.
Hong Kong OFCs (and LPFs) are also eligible for the Unified Funds Exemption from profits tax for profits from qualifying transactions and related incidental transactions, regardless of the fund structure, location of the fund’s management and control, fund size or fund purpose. Of note:
- Only profits from transactions in non-qualifying Hong Kong sourced assets will be subject to Hong Kong profits tax;
- Management fees are subject to profits tax in respect of profits arising in or derived from Hong Kong only; and
- Tax concession at 0% rate is potentially available for qualifying carried interest paid by private equity funds operating in Hong Kong to eligible persons.
Flexibility and light-touch regulation
The highly regulated and controlled nature of UCITS funds that make them desirable to investors’ in-house legal and compliance teams also comes with its own restrictions. In particular, there are restrictions on the kinds of investments such funds can make which may, in turn, result in lower returns. In a market where the UCITS branding has been the gold standard, there has been the tendency to try to shoehorn an investment strategy to meet the structural requirements of a UCITS fund rather than the other way around. UCITS structures, however, are based on public securities and open-ended daily liquidity. As investor demands – both institutional and retail – become more sophisticated, sponsors may desire new asset classes such as alternative investments and more illiquid assets. As investors become more sophisticated and question the limitation on investment returns resulting from UCITS restrictions, the UCITS branding may start to become less justifiable. Without the UCITS brand as a calling card, Irish and Luxembourg structures start to have much less value in Asia and, if there is no need to have the UCITS branding at all, it becomes more of a challenge to justify the costs associated with such European structures.
Both OFC and VCC legislation only dictate the structure of the fund itself but are silent on the investment powers, scope, requirements and restrictions of the fund. Instead, these are typically set out in its constitutional documents, or the regulations of the distribution domicile should the OFC or VCC choose to offer or distribute through a public channel. Both an OFC and VCC fund can be structured as an open-ended or closed-ended fund (notwithstanding that the OFC is named as such, it can accommodate fixed redemption terms) according to specific requirements. Both Asian Fund Structures’ investment focus can also be flexible and need not be dictated by specific limitations or requirements. As such, they can be used for traditional or alternative strategies, depending on the investors that it is targeting. As more and more investors become sophisticated, they will almost certainly fall into the category of accredited or institutional investors, to which a much less restrictive “restricted schemes” regime applies. Such a scheme only requires disclosure of such investment scopes and restrictions but does not dictate them. It can be stand-alone or part of an umbrella structure. Finally, both can be incorporated fresh or redomiciled from a foreign jurisdiction - the latter, in particular, may be of interest to a fund manager with existing, already-launched funds, who may have had no other choice but to establish a more expensive structure prior to the introduction of the Asian Fund Structures or who may now have discovered that the global investor base it targeted at the fund’s launch is now almost completely Asian-based.
Marketing compatibility – Asian passports
Singapore’s membership in the ASEAN CIS framework gives it an edge in respect of the Malaysian and Thai markets, while its close relationship with and geographical proximity to Indonesia means many Indonesian investors, in fact, invest in Singapore directly. Furthermore, its access to the Indian, Taiwanese, Japanese, South Korean and Australian markets either through favourable tax treaties with these domiciles or the restarting of the ARFP process (notwithstanding that Singapore has declined to commit to the ARFP pending resolution of tax issues) remains strong. Meanwhile, Hong Kong has its unique position as a special administrative region of the People’s Republic of China so fund managers domiciling funds under the OFC in Hong Kong should, in theory, benefit from the territory’s long-established fund management industry and its access to China, as well as a special profit tax exemption for onshore private OFCs. Unfortunately, as Hong Kong’s mutual funds recognition (MRF) regime is not designed under the same auspices as the UCITS and AIFMD where legislation, once passed, is required to be implemented in all European Union states, Hong Kong’s MRF regime requires negotiation and agreement with each party to the MRF. While a number of other MRF counterparties such as Switzerland and the United Kingdom have accepted the OFC under the MRF, China has yet to do so.
Passports are not the only option for managers to market a fund across jurisdictions. If you have ever wondered why there appear to be so many different versions of the same fund in different jurisdictions, it’s because an investor likes a strategy and wants to invest but can only do so if it is in a particular form or “wrapper”. Or, instead of conducting extensive (and often expensive) due diligence before investing in numerous funds, an investor could simply invest in an umbrella fund of already-approved funds. Some fund managers replicate a successful existing fund strategy that may not meet particular investors’ internal policy guidelines by establishing a synthetic alternative or secondary feeder fund that specifically meets such investor’s guidelines so that they can invest in it. Even though it may not make commercial sense to redomicile already existing funds in established markets into Asian Fund Structures, it may be justifiable to establish an OFC or a VCC under an umbrella structure as a synthetic alternative so it may be distributed in OFC or VCC-accepted distribution markets.
Further, foreign managers will likely incur high costs associated with engaging local distributors or establishing a local presence if they decide to offer offshore funds locally. Since feeder funds or “localised” fund structures dominate the foreign investment fund markets of Malaysia and Thailand, foreign managers without any local distribution assistance may damage relationships with potential local players and service providers. Investors from particular areas may simply go to a neighbouring locale customarily recognised by them as the investing centre, as Indonesian investors may do with Singapore.
One way to deal with these concerns is to establish a local or regional vehicle that is recognised, such as an OFC or VCC, and fit it within an existing structure to attract Asian regional markets. For example, some Asian-based fund managers with a varied client-base have established parallel funds with master-feeder structures to create local funds based off master UCITS funds in an effort to "localise" the fund and make it more familiar to local clientele or to meet with local regulations - but an OFC or VCC could help to lessen the costs and complication of such a web by replacing many of the differently regulated local funds with one OFC or VCC regulated by one regulator.
Eligibility for immigration programmes
For an interested potential immigrant, the key benefit of the Asian Fund Structures, which none of the other Traditional Fund Structures can offer, is that it can be used in connection with a family office structure or any other type of business in Hong Kong or Singapore to (assuming the necessary conditions are met) qualify for certain immigration programs that would, in the first instance, lead to work permits and eventually, permanent residence.
The family office regimes of both Singapore and Hong Kong can enable local employment permits to be provided to family members. Separate from this, there is the general investment immigration program enabling UHNWIs to obtain residence upon investment – in Singapore, this is the Global Investor Program. Meanwhile, Hong Kong has its own Capital Investment Entrant Scheme to enable immigration for ultra-high net worth individuals under its family office regime (although Hong Kong’s family office regime does not require the use of an OFC, an OFC could, ostensibly, be used).6
Investments in virtual assets
With the majority of analysts predicting that bitcoin will continue to rise in 2025 and having shown resilience through inflation and interest rate rises in 2022, virtual assets have caught the eye of fund managers. Bitcoins are generally considered to be a speculative product with a high risk of volatility. As such, the CSSF has asserted that, in respect of UCITS, “direct and indirect investments in virtual assets are prohibited when targeting non-professional customers and pension funds” but digital assets satisfying the criteria of MiFID financial instruments, including shares of companies involved in the virtual asset ecosystem, may fall within the definition of UCITS-eligible investments as they are not considered to be virtual assets. AIFs, on the other hand, are permitted to invest in virtual assets but would be subject to the provisions as to specialised investment funds that can only be marketed to “well-informed investors”.
However, rather than prohibit or restrict virtual assets, Hong Kong and Singapore have taken the pragmatic approach of accommodating virtual asset activities and products within an ecosystem of regulatory frameworks, guidance and minimum standards. Both Hong Kong and Singapore allow fund structures to be tokenized with UBS Asset Management launching its first live pilot of a tokenized VCC fund in 2023 in Singapore, while Hong Kong has launched several tokenized funds in the last year with China Asset Management (Hong Kong) Limited being the latest with its launch in Hong Kong of the first tokenized retail money market fund in the Asia-Pacific. Both jurisdictions provide for the authorization of virtual assets funds, albeit subject to certain conditions. For example, Hong Kong allows for retail investment in such virtual asset funds, while the Singaporean regulator for virtual asset funds tends to encourage only institutional investment in such virtual asset funds. Additionally, both the VCC and the OFC structures have been accepted for listing as ETFs on the Singapore Exchange and The Stock Exchange of Hong Kong Limited.
Choosing the right jurisdiction
Arguably, choice of structure and domicile will almost certainly be dictated by investors (which, indirectly, would depend on the size of the assets under management) and/or where investment capital will be raised. In tight market conditions, any fund structure a fund manager establishes must be favourable to, if not all their investors, at least a substantial majority of them. Ultimately, there is no such one-size-fits-all structure – one needs to consider the trade-offs in opting for one structure over the other.
Can the VCC with its numerous attendant benefits, tax treaties, and existing and potential passports, replace the EU UCITS? Unlikely. However, the point is, the VCC is not necessarily meant to do so. For someone targeting North American, European, and Asian institutional investors, whose fund has the critical size to justify the high costs of such a structure and possesses a suitable strategy capable of complying with the UCITS’ strict regulatory requirements while offering acceptable returns, an EU UCITS may make sense.
However, for those fund managers fortunate enough to be able to finance their funds substantially, if not entirely, with Asian investors who do not insist on a recognised domicile “brand” to invest, using Luxembourg or Irish UCITS vehicles to service Asian investors would be akin to drawing a sword to kill a fly (to quote an ancient Korean proverb). Indeed, many fundraisers are increasingly targeting Asian family offices who have less rigorous AML and onboarding investment requirements.
A fund manager that is currently utilising the UCITS structure for its funds should evaluate whether the bulk of their clients are Asia-based. If so, they may want to consider redomiciling existing UCITS funds into VCCs or OFCs or perhaps even originating new funds in Asia utilising one of the Asian Fund Structures.
While Asian Fund Structures aren’t necessarily the be-all and end-all “best” investment fund structure for everything, it may be the best investment fund structure for the right type of fund with an Asian connection. Investment managers with a substantial investor base capable of being based (if necessary, through a branch) in Hong Kong or Singapore, will find the Asian Fund Structures a worthy alternative to Traditional Fund Structures. Pair this with the Singapore Immigration Programs or the Hong Kong Immigration Programs (which make the Asian Fund Structures a potential benefit for persons wishing to move to Singapore or Hong Kong, as the case may be) and the potential versatility and usefulness of the VCC structure becomes even clearer.