Hong Kong Open-Ended Fund Company vs Unit Trust: Which Fund Structure Suits Your Strategy?

The Hong Kong Securities and Futures Commission (SFC) reported in its 2024-25 annual report that assets under management (AUM) in Hong Kong-domiciled funds reached HKD 2.8 trillion as of 31 March 2025, a 12% increase year-on-year. A significant portion of this growth came from Open-Ended Fund Companies (OFCs), a structure introduced by the SFC in 2018. As of mid-2025, over 300 OFCs had been launched, compared to approximately 150 in 2023. This surge is not accidental. The SFC has actively promoted the OFC as a more flexible, tax-efficient alternative to the traditional unit trust structure. For any fund manager considering Hong Kong as a domicile—whether for a new fund or re-domiciling an existing one—the choice between an OFC and a unit trust is now the first structural decision. The wrong choice can create unnecessary administrative burdens, higher costs, or limited investor appeal. This article outlines the statutory framework, operational differences, and practical implications of each structure under Hong Kong law.

Statutory Framework and Legal Personality

Open-Ended Fund Company (OFC) – A Corporate Structure

The OFC is governed by the Securities and Futures Ordinance (Cap. 571) and the subsidiary legislation under Part IVA. An OFC is a company with a separate legal personality. It can sue and be sued in its own name. This corporate form means the fund owns assets directly, and shareholders hold shares in the fund. The OFC must have at least one director who is an individual, and the directors are responsible for the management of the fund. The SFC’s Code on Open-Ended Fund Companies sets out the ongoing obligations, including the requirement for a custodian and an investment manager.

A key advantage of the OFC is the ability to issue and redeem shares on a daily basis. The legislation provides for both umbrella funds (with multiple sub-funds) and single-fund structures. Each sub-fund within an umbrella OFC is treated as a separate entity for liability purposes, provided the umbrella structure is properly constituted. This “ring-fencing” of liabilities is a statutory feature under section 112ZQ of the SFO.

Unit Trust – A Contractual Structure

A unit trust is not a legal person. It is a contractual arrangement governed by a trust deed between the fund manager (the manager) and a trustee. The trustee holds the fund’s assets on trust for the unitholders. The legal framework is primarily the SFO and the Code on Unit Trusts and Mutual Funds. Unlike an OFC, a unit trust cannot own property in its own name. The trustee is the legal owner of the assets, and unitholders have a beneficial interest.

The trust deed must specify the rights of unitholders, the fees, and the redemption procedures. The trustee must be independent of the manager and is responsible for safeguarding the assets. The SFC’s Handbook for Unit Trusts provides detailed guidance on the contents of the trust deed and the ongoing obligations of the manager.

Operational and Tax Considerations

Tax Treatment: The OFC Advantage

The Inland Revenue Ordinance (Cap. 112) provides a specific tax exemption for OFCs. Under section 26A(1A), profits derived from qualifying transactions by an OFC are exempt from profits tax, provided the OFC meets the conditions set out in the Inland Revenue (Profits Tax Exemption for Open-Ended Fund Companies) Order (Cap. 112 sub. leg. AP). This exemption applies to both the fund itself and its investors (on capital gains). The exemption is broader than the general exemption for offshore funds under section 20AC, which requires the fund to be “non-resident” and not carrying on business in Hong Kong.

Unit trusts, by contrast, do not have a statutory exemption. A unit trust may qualify for the offshore fund exemption under section 20AC, but this requires a detailed analysis of the fund’s trading activities and the location of its investment decisions. For a unit trust that is managed in Hong Kong, the profits may be subject to profits tax at the standard rate of 16.5%. This tax risk is a significant factor for fund managers who intend to have a Hong Kong-based investment team.

Administrative Burden and Costs

The OFC structure requires compliance with the Companies Ordinance (Cap. 622) in addition to the SFO. This means annual returns, directors’ reports, and audited financial statements must be filed with the Companies Registry. The SFC estimates the annual compliance cost for an OFC is approximately HKD 150,000 to HKD 300,000, depending on the number of sub-funds.

A unit trust has a simpler administrative structure. There is no requirement to file annual returns with the Companies Registry. The primary compliance obligation is to the SFC under the Code on Unit Trusts and Mutual Funds. The trustee handles most of the administrative work. The annual compliance cost for a unit trust is typically lower, ranging from HKD 80,000 to HKD 150,000.

Investor Appeal and Distribution

Institutional investors, particularly pension funds and insurance companies, often prefer the OFC structure because of the legal personality and the clear separation of assets. The OFC is also easier to list on the Hong Kong Stock Exchange (HKEX) under Chapter 20 of the HKEX Listing Rules. As of 2025, the HKEX has listed 12 OFCs, compared to over 200 listed unit trusts.

Retail investors are generally more familiar with unit trusts, which have been the dominant structure in Hong Kong for decades. The trust deed provides a clear legal framework for investor protection, and the trustee’s role as a fiduciary is well understood. For funds targeting retail investors, the unit trust may be the more marketable option.

Re-domiciliation and the OFC Regime

The SFC’s Re-domiciliation Framework

In 2024, the SFC introduced a streamlined re-domiciliation regime for overseas funds to migrate to Hong Kong as OFCs. The Securities and Futures (Open-Ended Fund Companies) (Amendment) Rules 2024 allow a non-Hong Kong fund to transfer its registration to Hong Kong as an OFC without winding up. The process requires approval from the SFC and the Companies Registry. The SFC reported in its 2024-25 annual report that 8 funds had re-domiciled under this regime as of March 2025.

This regime does not apply to unit trusts. A unit trust cannot be re-domiciled to Hong Kong. A foreign unit trust wishing to operate in Hong Kong must either be recognized by the SFC under section 104 of the SFO or establish a new Hong Kong-domiciled fund. The re-domiciliation option is a clear advantage for the OFC.

Practical Steps for Re-domiciliation

Step 1: The overseas fund must be a “qualifying fund” as defined in the amendment rules. This generally means it must be an open-ended collective investment scheme that is regulated in a jurisdiction with comparable regulatory standards.

Step 2: The fund must appoint a Hong Kong-based custodian and an SFC-licensed investment manager.

Step 3: The fund must submit an application to the SFC, including a re-domiciliation plan, the proposed OFC’s constitutional documents, and a legal opinion confirming the re-domiciliation is valid under the fund’s home jurisdiction.

Step 4: The SFC will issue an in-principle approval. The fund must then apply to the Companies Registry for registration as an OFC.

Step 5: Upon registration, the fund’s assets and liabilities are transferred to the OFC by operation of law. The fund’s existing unitholders become shareholders of the OFC.

Closing: Actionable Takeaways

1. If your fund targets institutional investors or plans to list on the HKEX, the OFC structure is the more suitable option due to its corporate form and eligibility for the HKEX’s Chapter 20 listing regime.
2. If your fund is managed in Hong Kong and you want certainty on tax treatment, the OFC’s statutory profits tax exemption under section 26A(1A) of the Inland Revenue Ordinance eliminates the risk of a tax challenge.
3. If your fund is an existing overseas fund considering a move to Hong Kong, the re-domiciliation regime applies only to OFCs, making the unit trust structure a non-starter for this purpose.
4. If your fund targets retail investors and you prioritize lower administrative costs, the unit trust remains the simpler and cheaper structure, with annual compliance costs estimated at HKD 80,000 to HKD 150,000.
5. Consult a Hong Kong solicitor specializing in investment funds to review your specific circumstances, including the fund’s investment strategy, target investor base, and tax profile, before making a structural decision.

This does not constitute legal advice. Consult a solicitor for your specific case.