What types of Alternative Funds can be authorised and listed?

In its announcement, the SFC noted that the new regulatory guidance aligns with the Government’s plan to broaden private equity fund distribution as set out in the 2024 Policy Address, by allowing investors to tap into opportunities in well-balanced portfolios of private assets managed by qualified professional asset management firms.

The SFC’s regulatory framework for Alternative Funds is broad and principle based, so as to cater for a wide array of private equity fund strategies and underlying investments. Some overarching considerations include:

• The expected market capitalisation of the Alternative Fund at the time of listing (ideally at least HKD 780 million)
• The historical performance of the manager of the Alternative Fund (ideally should have at least HKD 780 million AUM, as well as the requisite competence and compliance track record on a group-wide basis)
• The dividend policy of the Alternative Fund (ideally should generate regular income for distribution to investors on a continuous basis, although the SFC may consider other policies on a case-by-case basis having regard to the proposed fund strategy)
• The underlying investments of the Alternative Fund (ideally there should be a well-diversified portfolio comprising assets with varying investment life cycles, that are sourced or co-invested by firms with relevant experience)

The Circular does not prescribe a list of potentially eligible private equity funds, but by way of example, we envisage sizeable and diversified Private Credit Funds that offer regular distributions would be good candidates for authorisation and listing.

What other requirements will apply to Alternative Funds?

Although Alternative Funds will not be required to comply with the investment restrictions under the UT Code, other requirements under the UT Code and HKEx Listing Rules will be applicable. Below are some examples:

• Structure: The Alternative Fund must be closed-ended and its governing law should provide a level of investor protection comparable to that provided by a fund established in Hong Kong. The fund should also have a trustee/custodian that is acceptable to the SFC in compliance with Chapter 4 of the UT Code. For fund-of-funds structures, the value of the Alternative Fund’s investment in each underlying fund may not exceed 20% of the Alternative Fund’s NAV.
• Valuation: Alternative Funds must comply with the requirements under the UT Code in relation to valuations. Investments of the Alternative Fund must be independently and fairly valued on a regular basis, and full particulars regarding valuations must be disclosed in the offering document and annual reports of the Alternative Fund.
• Borrowings: Borrowing should not exceed 30% of the Alternative Fund’s NAV.
• Disclosure: The offering documents of the Alternative Fund should disclose details of: (a) the investment objectives and policy; (b) frequency for the publication of the fund’s NAV; (c) valuation policies and models; (d) key risks associated with the closed-ended nature of the Alternative Fund, the nature of the alternative assets and investments in illiquid assets; (d) key warning statements; (e) relevant matters relating to investment operations and risk management with explanation of investment strategy and risks; and (f) measures and safeguards against conflicts of interest.
• Investor Education: The manager of the Alternative Fund is expected to carry out extensive investor education before launching the Alternative Fund in Hong Kong.
• Distribution by intermediaries (client knowledge test): Alternative Funds are regarded by the SFC as complex products. Intermediaries are therefore subject to certain requirements, for example, an assessment of whether certain clients have knowledge of investing in relevant alternative funds/assets prior to effecting a transaction on their behalf.

Due to the wide array of alternative assets, the SFC may exercise its discretion to impose additional conditions, modify requirements or allow flexibility from strict compliance with certain requirements under the UT Code, taking into account the fund’s nature and investment strategy on a case-by-case basis as appropriate.

What approvals are required for authorising and listing an Alternative Fund?

• Authorisation: Funds that are offered to the public in Hong Kong are legally required to obtain prior authorisation from the SFC, unless exceptions apply (e.g., those that exclusively target professional investors). Accordingly, for an Alternative Fund to be offered to the public in Hong Kong through a listing, it must be authorised by the SFC.
• Licensing: All authorised Alternative Funds must appoint a manager that is acceptable to the SFC in compliance with Chapter 5 of the UT Code. If the manager is in Hong Kong, it should be properly licensed or registered under the Securities and Futures Ordinance to carry on its regulated activities, and the type of license required depends on the functions performed by the manager in Hong Kong.
• Listing: Listing approval will be sought from HKEx after the authorisation application for the Alternative Fund has been approved in principle by the SFC.

Other relevant credentials

Prior consultation with the SFC is required before an applicant applies for authorisation of an Alternative Fund for listing. While this is a new regime, Baker McKenzie has an established track record of facilitating SFC authorisation for other funds, including REITs and pension funds.

Band 1 Law Firm for Investment Funds: Registered Funds

Band 1 Law Firm for Investment Funds: Private Equity

Chambers, Asia-Pacific, 2025

We will continue to monitor further developments on Alternative Funds. If you have any questions on any of the above matters, please liaise with your usual contact at Baker McKenzie or the lawyers listed in this client alert.