Harbour Peak Credit Fund: Retail Feeder, Illiquid Valuations and Performance Fees
Harbour Peak Asset Management Limited is a Type 9 licensed corporation managing the Harbour Peak Credit Opportunities Fund, a Cayman Islands SPC with HKD 500 million in assets. The fund has 25 investors, all individual professional investors with portfolios above HKD 8 million. It invests in HK-listed high-yield bonds, uses up to 2x leverage, and imposes a 12-month lock-up. Fees are 2% management plus 20% performance fee with a high-water mark. The fund's valuation policy values illiquid bonds at 'the manager's fair value' using no independent pricing source. The auditor has qualified its review, and redemptions are suspended. Harbour Peak now wants to launch a feeder fund and distribute it through a retail bank to clients with HKD 500,000 to invest.
1. Can the feeder fund be marketed to retail bank clients? What authorization is required?
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The feeder cannot be marketed to retail bank clients unless it is authorised by the SFC under s.104 of the SFO and complies with the Code on Unit Trusts and Mutual Funds. The underlying fund is a private Cayman SPC offered only to professional investors; that exemption does not extend to a retail feeder. The bank's clients with HKD 500,000 are not professional investors, because the individual threshold is a portfolio of at least HKD 8 million. Marketing an unauthorised collective investment scheme to the public is an offence under s.103. The feeder could be sold only to professional investors under the PI exemption, with proper PI classification and risk disclosure. The bank would need Type 1 or Type 4 licences and product due diligence. If Harbour Peak wants retail distribution, it must restructure, appoint an SFC-authorised trustee and custodian, comply with investment and borrowing limits, and obtain authorisation.
2. What are the main valuation and conflict-of-interest concerns for Harbour Peak as fund manager?
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Valuation: the Fund Manager Code of Conduct requires the manager to have a proper valuation policy, independent pricing and governance. Using 'manager's fair value' with no independent source for illiquid bonds creates a risk of overvaluation, especially where the performance fee is based on NAV. Harbour Peak should segregate valuation from portfolio management, use independent brokers or pricing vendors, document assumptions, and disclose the policy. Conflicts: the 20% performance fee gives an incentive to mark up values; the auditor's qualification and suspension of redemptions point to a liquidity mismatch. The manager should consider side pockets, suspend subscriptions, and treat investors fairly. It must disclose the suspension and valuation uncertainty to all investors. If the manager cannot value reliably, it should not charge performance fees on those assets.
3. What should Harbour Peak disclose about the performance fee and high-water mark?
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The private placement memorandum must disclose the performance fee method: 20% of the increase in NAV per unit above the high-water mark, how the high-water mark is calculated, whether it crystallises annually, how equalisation works for investors subscribing at different times, and whether fees are charged on unrealised gains. The manager should explain that performance fees may be charged on illiquid or uncertain valuations, and that the high-water mark prevents double charging after losses. It should provide worked examples. The auditor's concerns and any fee accrual reversal should be disclosed. Under the Fund Manager Code of Conduct, fees must be fair and disclosed, and conflicts must be managed. If the fee is calculated on a valuation that later proves wrong, the manager should consider clawback or adjustment.