On 30 June 2026, the Securities and Futures Commission (SFC) issued its Frequently Asked Questions (FAQs) on the Listed Closed-ended Alternative Asset Funds (LAFs). In contrast to the SFC’s earlier circular issued in February 2025 which focused on the requirements for authorising LAFs, these FAQs provide insight and clarifications on fund structure and certain operational and regulatory requirements as may be applicable to LAFs and management companies post-authorisation and listing.
Fund Structure
The FAQ clarifies that the SFC expects sub-funds of the same umbrella fund to share similar investment objectives and risk profiles. Accordingly, the SFC does not expect LAFs to be set up under the same umbrella fund as other SFC-authorised unlisted funds or ETFs due to the distinct risk profiles and closed-ended nature of LAFs. However, management companies may establish multiple closed-ended LAFs with different investment strategies and asset classes under the same umbrella; such applications will be assessed on a case-by-case basis.
LAFs may also be established as a feeder fund provided that the master fund is acceptable by the SFC and the relevant regulatory requirements are complied. This facilitates international asset managers to utilise LAFs as a fund raising vehicle in Hong Kong to attract regional capital into offshore master funds.
Listing and Deployment of Capital
An LAF may be listed in a number of ways including through an initial public offering (IPO), an offer for sale or an introduction, in accordance with the relevant requirements under the Main Board Listing Rules (MBLRs) and other guidance issued by the Hong Kong Exchanges and Clearing Limited from time to time and after consultation with the SFC. For LAFs raising capital through an IPO, the SFC typically permits a ramp up period of up to one year to build up the LAF’s portfolio. During this period, capital may be deployed in stages subject to the management company’s discretion and the LAF’s constitutive documents provided that clear disclosure is made in its offering documents.
Governance Framework to align with Publicly Listed Companies
The SFC mandates governance standards for LAFs that align with the MBLRs, thereby empowering shareholder / unitholder (Holder) rights. Specifically, LAF constitutive documents and offering documents must include certain provisions that mirror the governance framework of Hong Kong public listed companies. Examples include:
- Board Composition: At least one-third of board members of an LAF must be independent non-executive directors (INEDs) with a minimum of three INEDs. Such INEDs would be expected to play an important role in the governance of valuation policies and connected transactions.
- Audit Committee: An audit committee must be established on terms substantially equivalent to the requirements applicable to listed companies under MBLRs.
- Minority Holder Protection: Minority Holders (minimum stake required not higher than 10% voting rights) may convene a general meeting and add resolutions to a meeting agenda.
- Voluntary winding up, delisting and withdrawal of the SFC’s authorisation: Holders may initiate a voluntary winding-up or request the delisting or withdrawal of the SFC’s authorisation of an LAF at any time after one year of its listing by way of an extraordinary resolution in a general meeting. The arrangement allows for greater investor comfort given the illiquid nature of closed-ended funds which may be treated at a discount without the ability to initiate redemptions by Holders.
- Power to appoint and remove management company and auditors: Holders shall have the power to appoint and remove the management company (subject to the SFC’s prior approval) and to remove auditors by an ordinary resolution.
- Disclosure regime: Provisions in the constitutive document (including those of non-corporate structures) must substantially replicate those in Part XV of the Securities and Futures Ordinance, requiring such Holders crossing the 5% ownership threshold, directors and chief executives to make disclosure filings for their interests.
Application of Takeovers Codes
The LAF is required to comply with the principles and rules under the Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Codes) unless otherwise permitted by the SFC in advance; and Holders are required to comply with the Takeovers Codes unless otherwise waived by the SFC in advance.
The SFC expects prior consultation where a proposed redemption, takeover, merger, amalgamation or restructuring is carried for LAFs.
Share Buy-back Mechanism
To manage secondary market discounts for units / shares of LAFs, the FAQ provides for specific share buyback rules. Independent Holders may, by an ordinary resolution, grant the management company approval or a general mandate to permit on-market buybacks on the Stock Exchange of Hong Kong (SEHK), subject to a cap of 10% of the total number of issued units / shares (excluding treasury shares) of the LAF as at its latest financial year end.
Off-market buy-backs from certain specific Holders is permitted subject to an extraordinary resolution passed by independent Holders, provided that where an off-market buy-back is structured as a general offer to all Holders, approval of the independent Holders may be given by way of ordinary resolution.
The buyback price by an LAF for its own shares or units on SEHK is subject to a strict “dual cap” mechanism and must not exceed the lower of (i) a 5% premium over the average closing market price of the five preceding trading days on which such units / shares were traded on SEHK, or (ii) the most recently published net asset value per unit or share.
Raising Capital for LAFs
The FAQ provides that LAFs may raise further capital and issue additional interests post-listing to facilitate additional investments in accordance with the LAF’s investment objective and policy. However no further interest in an LAF may be issued within six months from the commencement of trading on SEHK.
(i) Any subsequent issuance must be priced at or above the net asset value per unit or share, taking into account the relevant transaction costs, post-listing and the arrangement must be disclosed in the offering documents. If an LAF seeks to issue new units or shares priced at a discount to its net asset value, the following requirements generally apply: prior approval from Holders is required by way of a specific approval or generate mandate granted to the management company by ordinary resolutions;
(ii) The aggregate number of new units / shares to be issued in a financial year should not increase the total number of units / shares outstanding as at the end of the previous financial year (excluding treasury shares) by more than 20%; and
(iii) New units / shares may not be issued for cash consideration at a price that is a 20% or more discount to the market price per unit / share.
Dividends and Distribution Arrangements
The FAQs clarify that after realising or exiting from investments, the management company may distribute some or all proceeds as dividends or retain them for other purposes such as reinvestment or settling liabilities.
Although it is preferable for an LAF to generate regular income to investors, the feasibility of regular distributions would be subject to the underlying assets and strategy of the LAF and the SFC has indicated a degree of flexibility to such arrangement. his may dampen concerns over the ability to generate regular distributions to investors in consideration of the illiquid and relatively long investment horizons typical of closed-ended funds.
Connected Transactions and Valuation
Transactions between an LAF and its management company (including its connected persons and delegates) may trigger certain regulatory requirements under the Code on Unit Trusts and Mutual Funds and the Fund Manager Code of Conduct. In particular, transactions carried out by or on behalf of an LAF must be executed at arm’s length and in the best interest of Holders. Connected transactions must be disclosed in the LAF’s annual report.
Manager should note that an independent third-party valuation would be expected for connected party transactions and such transactions may be subject to additional requirements such as review by the INEDs and additional reporting requirements.
Takeaways for Fund Managers
The FAQs represents an important guideline on the compliance and operational requirements for the launch and management of LAFs. Management companies seeking to manage LAFs will be required to prioritise and carefully prepare the constitutive documents and offering documents of its LAFs to ensure that the enhanced governance and regulatory requirements are integrated to ensure full regulatory compliance.
At Deacons, our team of dedicated asset management practitioners are equipped to help management companies in preparing the legal documents required under laws and regulations and to obtain authorisation from the SFC. Please reach out to your usual contacts at Deacons for further information.
