Funds, collective investment schemes and ETFs
What this domain tests
Questions test the authorisation boundary between retail and private funds, the key restrictions in the Unit Trusts and Mutual Funds Code, and how ETFs and REITs actually work.
Core rules
- A collective investment scheme offered to the Hong Kong public must be authorised by the SFC under SFO Part IV. Issuing an advertisement or making an offer for an unauthorised scheme is an offence, subject to safe harbours such as offers to professional investors and other limited exemptions.
- Authorisation is not a recommendation or a guarantee of performance; the offering document must be SFC-authorised and the investor warned that authorisation does not imply endorsement.
- The UT Code imposes diversification (broadly no more than 10% of net asset value in securities of a single issuer), liquidity and disclosure requirements, and restricts borrowing and use of derivatives.
- ETFs are listed and SFC-authorised; physical ETFs hold the underlying, synthetic ETFs use swaps and therefore carry counterparty exposure. Hong Kong-listed ETFs are exempt from stamp duty, and market makers provide liquidity.
- REITs follow the REIT Code and must distribute at least 90% of audited net income after tax.
Worked example
A fund's holding in one issuer drifts from 9% to 12% of NAV purely because other holdings fell. This is a passive breach: the manager must treat restoring the 10% limit as a priority and rectify within a reasonable period, not sell at any price immediately. An active purchase taking the position to 12% would be a breach at the point of trade.
Traps that cost marks
Treating SFC authorisation as an endorsement; assuming synthetic ETF risk equals physical ETF risk; and computing an ETF's value from NAV when the market price may trade at a premium or discount.