Open-Ended Fund Companies (OFC) in Hong Kong: A Complete Guide for Fund Managers

Introduction: Hong Kong's Corporate Fund Vehicle

The Open-Ended Fund Company (OFC) is Hong Kong's purpose-built corporate fund vehicle, introduced under the Securities and Futures Ordinance (Cap. 571) in 2018 and significantly enhanced since then. It provides a Hong Kong-domiciled alternative to Cayman Islands fund structures for both retail and private funds, offering variable capital — the ability to issue and redeem shares freely without the capital maintenance restrictions that apply to ordinary Hong Kong companies.

Since its introduction, the OFC has gained traction among fund managers seeking a credible, cost-effective, Hong Kong-domiciled structure, particularly for: Asian retail funds seeking SFC authorisation, ESG and green finance funds targeting the growing HK retail market, family office vehicles and single family office investment structures, and private equity and credit funds that previously defaulted to Cayman LPs.

The Legal Framework

OFCs are incorporated under Part IVA of the SFO and are regulated by the SFC. The Companies Ordinance (Cap. 622) does not apply to OFCs (except as specifically incorporated by reference in the SFO OFC regime). The SFC's Code on Open-Ended Fund Companies (the “OFC Code”) sets out the detailed requirements applicable to all OFCs.

Key Features of the OFC Structure

Variable Capital

Unlike ordinary companies (which have fixed share capital and are subject to capital maintenance rules), an OFC has variable capital: it can issue, repurchase, and cancel shares at any time without shareholder approval, court approval, or compliance with capital reduction procedures. The net asset value of the OFC fluctuates with the value of the fund's underlying assets — a fundamental feature of investment fund structures.

Sub-Funds

An OFC may establish multiple sub-funds, each with its own investment objectives, assets, and class of shares. Sub-funds have ring-fenced assets and liabilities: the assets of Sub-Fund A are not available to meet the liabilities of Sub-Fund B. This segregated liability feature is a significant advantage over Cayman umbrella fund structures, where the legal segregation of sub-fund liabilities requires complex contractual arrangements.

Share Classes

Each sub-fund may have multiple share classes, enabling differentiation by currency, fee structure, distribution policy (accumulation vs. distribution), and investor type. This allows a single OFC to offer the same underlying investment strategy in multiple formats to different investor categories.

Governance Structure

An OFC must have:

• A board of directors, with at least one independent director
• An investment manager: an SFC-licensed Type 9 manager (or an overseas manager authorised by an acceptable overseas regulator)
• A custodian: an SFC-licensed entity or a bank licensed by the HKMA, responsible for safekeeping assets and monitoring the manager's compliance with investment restrictions
• An auditor and, for non-private OFCs, a compliance function

Public vs. Private OFCs

Public OFCs (SFC-Authorised)

A public OFC is one whose shares are offered to retail investors in Hong Kong under SFC authorisation. The SFC authorisation process for a public OFC involves: review of the OFC prospectus, assessment of the investment manager's compliance with the Fund Manager Code of Conduct, and verification that the OFC meets the relevant product requirements under the applicable SFC product codes (Code on Unit Trusts and Mutual Funds or Code on Investment-Linked Assurance Schemes).

SFC-authorised OFCs may be marketed to the Hong Kong public without restriction. They benefit from the high credibility and investor protection that comes with SFC authorisation, and may access the Mandatory Provident Fund (MPF) platform if they meet MPF Schemes Authority requirements.

Private OFCs (Sophisticated Investors)

A private OFC does not seek SFC product authorisation. Its shares may only be offered to “professional investors” as defined in the SFO (essentially, institutional investors and individuals with portfolios of HK$8 million or more). Private OFCs are not required to comply with the retail investor protection requirements of the SFC product codes but must still comply with the OFC Code.

Private OFCs are the typical structure for: hedge funds, private equity and credit funds, family investment vehicles, and other structures that do not seek retail distribution.

The OFC vs. Cayman Exempted Company: Comparison

The traditional choice for Hong Kong fund managers has been a Cayman Islands Exempted Company or Exempted Limited Partnership. The OFC offers several advantages over Cayman structures:

• Onshore domicile: An OFC is a Hong Kong entity, providing a credible, well-regulated local domicile without the offshore connotations of Cayman. This is increasingly valued by ESG-conscious and institutional investors who require transparent governance.
• Sub-fund segregated liability: Cayman umbrella funds require complex contractual arrangements to achieve equivalent segregation; OFC sub-funds have statutory ring-fencing.
• Tax efficiency: OFCs benefit from the Unified Fund Exemption (UFE), which provides a broad profits tax exemption for qualifying fund transactions — equivalent to the tax treatment of Cayman funds but without the need for an offshore structure.
• Re-domiciliation: The OFC regime allows overseas funds (including Cayman funds) to re-domicile to Hong Kong as an OFC, providing a straightforward path for migration from an offshore to an onshore structure.

Advantages of Cayman structures that OFCs do not replicate:

• Cayman is the standard expectation for US and European institutional investors; some may be unfamiliar with the OFC structure
• Cayman exempted limited partnerships remain the preferred structure for private equity funds with LP/GP dynamics (though Hong Kong's LPF provides a comparable onshore alternative)

Re-Domiciliation of Overseas Funds to OFC

The SFC introduced a re-domiciliation mechanism in 2021 enabling overseas corporate funds to migrate to Hong Kong as OFCs. The process involves: applying to the SFC for re-domiciliation approval, compliance with the OFC Code from the date of re-domiciliation, and relevant filings with the Companies Registry.

Re-domiciliation has been used primarily by managers seeking to migrate Cayman retail funds to Hong Kong OFCs in connection with SFC product authorisation and listing on recognised fund platforms. It is increasingly attractive as the OFC ecosystem matures and institutional investor familiarity grows.

Tax Treatment of OFCs

OFCs benefit from the Unified Fund Exemption (UFE) under the Inland Revenue Ordinance. Under the UFE, qualifying transactions carried out by or for a qualifying fund are exempt from profits tax. A qualifying fund includes a company (including an OFC) that is managed in Hong Kong by a licensed investment manager, has a specified number of investors, and carries out qualifying transactions in specified assets.

The tax exemption covers profits from: shares, stocks, bonds, futures, foreign exchange, swaps, deposits, and other qualifying specified assets. It does not automatically cover profits from Hong Kong real property, certain Hong Kong-sourced income, and some private credit instruments — careful structuring is required for funds with these exposures.

Practical Steps to Incorporate an OFC

The OFC incorporation process involves:

• Engaging SFC-licensed Type 9 investment manager (the manager must be appointed before incorporation)
• Preparing the instrument of incorporation and the company offering document (prospectus for public OFCs; information memorandum for private OFCs)
• Submitting the application to the Companies Registry (for incorporation) and to the SFC (for the manager's declaration and, if a public OFC, for product authorisation)
• Obtaining the certificate of incorporation from the Companies Registry
• Opening custody accounts with a licensed custodian
• Completing the SFC notification of commencement of business

The incorporation and set-up process for a private OFC (without SFC product authorisation) typically takes 4–6 weeks. For a public OFC (with SFC product authorisation), the process mirrors the SFC fund authorisation timeline of 3–6 months.

Conclusion

The OFC has established itself as a credible and competitive Hong Kong-domiciled fund structure for both retail and professional investor markets. Its variable capital structure, sub-fund segregated liability, and tax efficiency under the UFE make it an attractive alternative to offshore structures for fund managers who value a transparent, well-regulated Hong Kong domicile. As institutional investor familiarity with the OFC grows, and as the SFC continues to develop the OFC ecosystem, it is likely to become the default choice for new Hong Kong-managed fund launches.

Alan Wong LLP advises fund managers on OFC formation, SFC product authorisation, and fund governance in Hong Kong. Contact our Investment Funds team to discuss your fund structure.