The Greater Bay Area: Below the Radar

In uncertain times like these, with global markets in a tailspin, instead of the benchmark-constrained bigger investment houses, nimble operators may be better placed to generate better returns on capital.

One such partner could be a relatively new kid on the block, Finex Hong Kong Limited . A subsidiary of the Luxembourg-headquartered Finex International . The company works exclusively for professional investors, and since opening in Hong Kong three years ago has seen its operation grow from just three people when it started in March 2017, to 16 today.

In the relatively short period that Finex has been up and running in the Special Administrative Region it has developed and is managing three of its own funds in the city, two of them domiciled in the Cayman Islands and another in Luxembourg, with an aggregate asset size of around US$50 million.

Multi-national skills

While its major investors are from Hong Kong and Europe, Finex is working to leverage its presence in Hong Kong – and therefore its reach into wider Asian investment markets – by making the most of the multi-national complexion of its professionally-trained staff.

Michael Stockford, Chief Executive Officer of Finex Hong Kong Ltd, said: “We are very proud of the multi-cultural and multi-lingual team we have put together in Hong Kong. Among our staff we have a significant number of Chinese and four Koreans, and we are able to offer services to clients in Cantonese, Mandarin, English, Korean and French.”

That diversity, coupled with the manner in which Finex is licensed by the regulatory authorities in Hong Kong, allows the company to maximise investor benefits. The effectiveness of the regulator, the Hong Kong Securities and Futures Commission (SFC) , is crucial.

As Stockford explained, saying: “The Hong Kong SFC is without doubt a world class regulatory body. It is well run by professionals who understand what the industry needs.

“As things stand, in Hong Kong we have three SFC licences, namely Type 1, Type 4 and Type 9. Type 1 allows us to deal in securities, Type 4 allows us to advise and Type 9 allows us to carry out discretionary asset management. The main ones we use are Type 1 and Type 9. Under the Type 9 licence we have three funds which we are the discretionary manager for and these include asset classes such as Asian equities, fixed income and derivatives. The Type 1 licence also allows us to market other peoples’ funds which we do not manage.”

Unique collaboration

In terms of the Greater Bay Area (GBA), Finex sees Shenzhen and Guangzhou as promising markets to launch new funds, but believes that at this stage in the evolution of the GBA initiative this can be most easily achieved in Hong Kong via Stock Connect – a unique collaboration between the Hong Kong, Shanghai and Shenzhen stock exchanges – which allows international and mainland Chinese investors to trade securities in each other’s markets through the trading and clearing facilities of their home exchange. First launched in November 2014, the scheme now covers over 2,000 eligible equities in Shanghai, Shenzhen and Hong Kong.

The GBA initiative aims to create a Pearl River Delta powerhouse which links both the Hong Kong and Macao SARs plus nine other Guangdong cities. The transformation of the region – which encompasses a massive market of 70 million potential customers with a combined GDP of US$1.6 trillion – is part of a global vision connected to China’s bold aim of creating an inter-linked world through its wider Belt and Road Initiative , aiming to establish long-lasting economic ties not only with its closest neighbours, but far beyond in the wider world.

Stockford said: “I very much like the idea of the GBA, of that there is no doubt. However, right now – and until certain understandable issues are ironed out – I feel we can run our operations from Hong Kong. Would it be of benefit for us to have a Mandarin-speaking research team in mainland China? No doubt. But is the time right for that on a cost-benefit basis right now? I don’t think so.”

Mutual Recognition Reform

Among the challenges for the firm in making bigger inroads into the GBA is that of the mutual recognition of investment funds in mainland China, which at present is time-consuming and costly. Even when done, fund distribution presents another obstacle as the market is very much dominated by the so-called “big four” banks, which account for at least 75% of all the funds distributed in the mainland.

Stockford said that a silver lining is the new limited partnership regime for investment funds which came about thanks to the publication of the Limited Partnership Fund Bill (“ LPF Bill ”) on 20 March 2020. The LPF Bill , which is expected to be enacted as the Limited Partnership Fund Ordinance ( LPFO ) and to come into operation on 31 August 2020, will provide a new standalone statutory framework for the constitution of limited partnership funds (LPFs) in Hong Kong.

At present, a fund may be established in Hong Kong in the form of a unit trust or an open-ended fund company. These fund structures are, however, more popular among public funds or hedge funds. Meanwhile, it is more common for private funds, such as private equity (PE) funds, to be established in the form of a limited partnership.

In Hong Kong, the Limited Partnerships Ordinance (Cap. 37) (“ LPO ”) was enacted about a century ago and is not tailored to meet the demands and requirements of present day investment funds. For example, the LPO does not allow flexibility in capital contributions and distribution of profits, or allow a fund to have the necessary contractual flexibility, or provide a straightforward dissolution mechanism.

Stockford agrees that the absence of these features under the existing LPO discourages fund managers from establishing PE funds in Hong Kong in the form of a limited partnership and hampers the development of a more thriving local PE market.

While at the moment PE funds in Asia are typically established under the limited partnership regime, in other jurisdictions – such as the Cayman Islands – the fund industry has been calling for an early introduction of a tailor-made limited partnership regime for attracting investment funds to establish and operate in Hong Kong. This move would incentivise funds to align their structures with business activities, and against such a backdrop Hong Kong’s Financial Secretary, Paul Chan, announced in his 2018-19 Budget that the HKSAR Government would examine the feasibility of introducing a limited partnership regime specifically for funds in the city.

Stockford has been a long-term supporter of many of the cross-border initiatives launched in recent years, including QDII, QFII, Mutual Fund Recognition, Stock Connect and, more recently, both the LPO regime and the GBA cross-boundary wealth management connect scheme. Ultimately, he sees such programmes as demonstrating the efficacy of the mainland China / Hong Kong partnership when it comes to delivering on truly innovative trade facilitation measures.

Lean Operation

Stockford was also keen to point out that, despite the relatively small size of the Finex operation here, it was able to measure up to the big players in the private equity market because of both the type of licences it has from the SFC and the nimbleness of its operations.

An example of this can be see, he said, by the fact that despite the global pandemic emergency currently underway, Finex has been in a position to manage and operate the investment funds it does without allowing them to stray into negative performance territory. This is because their strategies allow them to short and use cash and derivatives to protect in turbulent markets.

He said: “One of the three funds we have was actually launched on 30 April 2020 – pretty much in the eye of the storm of the Covid-19 shakeup. The performance of all three funds has remained stable so far this year, despite a sharp market deterioration worldwide.

“In my opinion, this serves as a proof of how a relatively small asset management company can produce positive returns, whilst the larger, more traditional funds that are long only, with not much room to hedge or even hold cash, suffer in downturns. These firms are normally measured against performance benchmarks such as the S&P 500 index and the Morgan Stanley Composite Index (MSCI) as the base for a (passive) replication strategy.

“In other words, given the dreaded ‘tracking error’ worry, the chance of these big funds outperforming the market is relatively low.”