Hedge fund tax break grips Hong Kong as banks fear exodus

Hong Kong's decision to lower taxes for hedge funds has triggered a rush of activity across the city's financial sector. Investment banks are worried about a potential exodus of proprietary traders, while one fund is even considering rebranding an administrative employee as an investor relations official. The local government has introduced a new tax bill to lawmakers, with the most notable provision being an expansion of tax exemptions on carried interest - a share of investment profits that can result in substantial bonuses for top fund managers.

The bill is still being processed in Hong Kong's legislature but has already sparked a wave of lobbying, speculation and gossip within the financial sector. Investment firms are seeking inclusion in the tax relief, while family offices and small hedge funds are exploring ways to qualify for the tax-free bonuses. The excitement surrounding the proposal highlights the significant assets under management in Hong Kong, with financial sector entities overseeing around US$5.4 trillion.

This move poses a challenge to Singapore and Dubai, which have been actively attracting asset managers in recent years. The tax exemption on carried interest has drawn the most attention, as it could yield significant benefits for lucky employees. The tax bill, sent to the Legislative Council in June, aims to reinforce Hong Kong's position as the prime asset and wealth management center in the region.

However, the specifics of who will benefit from the tax relief remain unclear. While carried interest has historically been used by private equity firms to reward executives, hedge funds typically pay annual performance fees, which are not as commonly taxed. The broadening of the carried interest concept to include hedge funds' performance fees has led to increased interest among firms exploring ways to qualify for the tax break.