Hong Kong regulator reclassifies certain funds with exposure to private markets

The Securities and Futures Commission (SFC) in Hong Kong has reclassified certain authorized funds with significant exposure to private market assets as complex products, altering the threshold for selling these products to retail investors. To be categorized as complex, funds must have direct or indirect exposure to private market assets representing at least 50% of their net asset value.

The SFC noted that some funds gained indirect exposure to private market assets through intricate and layered structures, which could lack transparency and make it difficult for retail investors to comprehend the underlying risks.

The SFC issued a circular on Thursday to explain these changes, citing concerns over low liquidity, valuation issues, and higher credit risks associated with funds investing in private credit and private equity. Funds classified as complex products would now be subject to stricter SFC requirements, including enhanced transparency regarding underlying investments and associated risks, as well as complying with selling regulations like product suitability.

This regulatory move aims to strengthen Hong Kong's framework for retail funds with private market exposure by increasing transparency and introducing necessary investor safeguards. Elisa Ng, executive director of investment products at the SFC, emphasized that these changes would promote greater clarity and protect investors. Market attention has intensified on private credit market risks over the past year, as evidenced by HSBC Asset Management's decision to halt the sale of a retail fund tied to private credit amid concerns about hidden risks.

Under the new guidelines, funds with private market exposure must clearly disclose three critical aspects in their offering documents: the extent and method of their exposure, the nature and characteristics of the underlying assets, and the key risks, including their potential impact on the fund and investors. Regulatory authorities encouraged fund managers to review their existing funds, update their offering documents as soon as practicable, and maintain open communication with distributors.

New funds subject to these regulations may face more stringent scrutiny during the application process and may not qualify for the Fund Authorisation Simple Track (FASTrack) for quicker processing.