Hong Kong’s wealthy investors are turning to alternative assets for diversification and returns as stocks and property underperform, according to an Endowus survey last year. Nearly 90 per cent of high-net-worth investors said they wanted to increase allocations to alternative assets as they seek increased exposure to different sources of returns.
Regulators have taken note: a February 17 circular from the Securities and Futures Commission (SFC) clarified requirements for listing close-ended alternative funds on the Hong Kong stock exchange, a significant step towards diversifying the city’s investment landscape.
Close-ended funds differ from open-ended ones (such as exchange-traded funds, which can also be listed) in that the amount of shares available is fixed.
The SFC’s move allows close-ended alternative funds investing primarily in private and illiquid assets – such as private equity, private credit, infrastructure equity and infrastructure debt – to seek public listing once they meet certain requirements.
These funds fall outside the conventional investment categories of stocks, bonds and cash, and were historically available only to institutional investors and ultra-high-net-worth individuals – an elite few.
“High-net-worth individuals wishing to invest in alternative funds may have only been able to access them via private wealth channels in the past, unless you were extremely well connected with the right fund managers or industry players,” said Cindy Shek, partner at commercial law firm King & Wood Mallesons.
There is immense potential in these alternative funds as the regulatory landscape evolves. They offer a regulated way for retail investors to gain exposure to private markets without the high minimum investment thresholds typically associated with private equity or venture capital. These funds provide liquidity through secondary market trading – giving them a significant edge over traditional private funds with lock-up periods.
The SFC circular also addressed a key obstacle to the approval of close-ended alternative funds. Under standard rules, funds were barred from investing more than 15 per cent of their net asset value in securities not listed or quoted on any market – a requirement that may be at odds with funds that focus on private and illiquid assets.