Setting Up a Crypto Fund in Hong Kong: A Guide

Hong Kong, as a global financial hub, boasts a mature asset management ecosystem that has expanded to include the virtual asset space. Since 2024, a wave of crypto-friendly policies has drawn Web3 entrepreneurs to set up shop here. Many of them run into confusion when trying to establish a crypto fund in Hong Kong — wrestling with unfamiliar fund concepts, navigating a complex regulatory environment, and working through cumbersome procedures.

Don't worry — if these are the concerns keeping you up at night, Mancun Law has the answers.

3 Core Concepts

Before setting up a crypto fund, you need a firm grasp of 3 core concepts that commonly trip up aspiring fund founders:

Fund Manager: The Fund Manager is responsible for making investment decisions. Unlike mainland China, Hong Kong allows private funds to be managed independently by fund management companies, removing the need for a designated fund manager. However, for public funds investing in virtual assets — such as Bitcoin ETFs — the Securities and Futures Commission (SFC) requires at least one Key Investment Personnel (KIP): a qualified staff member with relevant experience who oversees investment strategy and compliance.

Fund Management Company: The Fund Management Company, which operates the crypto fund, must hold a Type 9 license (Asset Management) from the SFC. This comes with specific requirements:

Capital Requirements: Maintain a minimum capital level, with the exact amount varying based on the size of the company.
Compliance Framework: Establish a robust compliance framework, including anti-money laundering (AML) and counter-terrorist financing (CFT) measures.
Risk Management: Deploy effective risk management strategies to mitigate risks associated with investing in virtual assets.

Fund Product Structure: The fund product — the investment vehicle itself — must ensure its assets are fully segregated from the personal assets of both the Fund Management Company and the Fund Manager. This segregated structure minimizes the risk of asset misappropriation and protects investor interests. Key aspects include:

Asset Segregation: Fund assets are kept independent from those of the fund manager and other affiliated parties, safeguarding investor capital.
Legal Entity: Funds are typically registered as separate legal entities, strengthening asset protection and governance transparency.
Investor Rights: The fund product structure clearly defines investor entitlements, including profit distributions, asset redemptions, and other terms.

Once you have a solid handle on these 3 core concepts, the next critical question becomes: "How do you actually structure a fund?"

Setting Up a Crypto Fund

Here are the key steps and considerations when establishing a crypto fund:

Choose the Right Fund Type: Selecting the appropriate fund type is paramount when setting up a crypto fund in Hong Kong. There are two main categories:

Private Funds: Targeted at high-net-worth individuals, professional corporate investors, or institutional professional investors, with higher investment thresholds and less stringent regulations in certain areas.
Public Funds: Open to retail investors and subject to stricter regulations — Bitcoin ETFs fall into this category. For crypto funds targeting the retail market, additional specific requirements apply:
- Investment Scope: Invest only in virtual assets recognized by the SFC to minimize risk.
- Disclosure Requirements: Provide comprehensive public disclosures to investors, covering the nature of the investments, risk factors, and fund structure.
- Ongoing Reporting: Periodically report fund performance, compliance status, and changes to investment strategy to the SFC.

Determine the Fund Structure: Several common fund structures are available:

Unit Trust: Under this arrangement, investors purchase fund units representing a proportional ownership stake in the underlying fund assets. The fund's assets are overseen by a trustee who manages and services those assets. The unit trust model is particularly well-suited for pooling capital from multiple investors, which is advantageous for the capital-intensive operations typically required to set up and manage crypto funds in Hong Kong.
Open-Ended Fund Company (OFC): An OFC is an investment fund registered in Hong Kong in corporate form. Unlike a unit trust, it is a standalone legal entity with a board of directors. The board has fiduciary and statutory duties of care, skill, and diligence to the OFC. Note: Don't be misled by the word "open-ended." Under the SFC's OFC framework in Hong Kong, despite the name, an OFC can be structured as a closed-ended fund if its offering documents specify redemption restrictions and its articles of incorporation intend it to operate as a closed-ended fund.
Limited Partnership: Partners include general partners and limited partners, with liabilities and profit-sharing arrangements clearly defined. The limited partnership structure is commonly used for private equity projects involving illiquid assets. Below is an example of a Hong Kong OFC structure. The SPC/SP structure in the Cayman Islands consists of a master fund (SPC = Segregated Portfolio Company) and multiple sub-funds (SP = Segregated Portfolio). Hong Kong has an analogous OFC framework where this structure can help reduce operating costs by eliminating the need to incorporate a new company for each sub-fund.

Image source: SFC website

In the context of crypto funds, structures like SPC or OFC offer an advantage by allowing fund managers to deploy different strategies across different portfolios depending on the virtual assets held in each. This is a win-win for both managers and investors: investors can choose which portfolio to invest in without worrying about their assets bleeding into other portfolios, while managers are spared the burden of establishing entirely separate funds.

Beyond setting up the crypto fund itself, another critical component to consider is asset custody — ensuring the independence, security, and transparency of fund assets.

Fund Asset Custody

The quality of custody services directly affects investor confidence and the smooth operation of the fund, so careful selection is essential. Fund management companies in Hong Kong typically use the following custody arrangements for different asset types:

Segregated Accounts: A segregated account means each client's assets are held in a separate account. This enables accurate NAV calculation for each client and significantly reduces the risk of asset misappropriation. Managing segregated accounts enhances asset traceability and transparency, meeting the SFC's stringent requirements for fund asset management in Hong Kong.
Omnibus Accounts: This involves investment managers pooling funds from multiple investors into a single fund product. It simplifies the management process and reduces operating costs through economies of scale. However, it also requires more complex administrative procedures and higher compliance demands. To protect each investor's interests, fund management companies in Hong Kong establish strict investment allocation and redemption mechanisms, including periodic audits to ensure the safety and fairness of the fund.

Additional custody measures and considerations specific to crypto fund management in Hong Kong include:

Encryption Technology: Custody services typically employ advanced encryption technology to secure virtual assets during storage and transactions.
Cold Storage Solutions: To guard against hacking and asset theft, cold storage (offline storage) must be used.
Compliance and Regulation: Custody services in Hong Kong must comply with SFC regulations, including but not limited to AML and CFT requirements.
Periodic Reporting: Custodians must provide regular asset reports to the fund management company and investors, ensuring timely information flow and transparency.
Risk Management: Custody service providers must establish comprehensive risk management systems to address market volatility and potential risk events.

Through these measures, crypto fund management companies in Hong Kong can provide investors with a secure and reliable investment environment.

Unified Fund Tax Exemption Regime for Crypto Funds in Hong Kong

Once your crypto fund business is officially up and running, you may want to explore Hong Kong's Unified Fund Tax Exemption Regime.

Can Crypto Funds in Hong Kong Achieve Profits Tax Exemption?

Hong Kong's Unified Fund Tax Exemption Regime allows funds to be exempt from Hong Kong profits tax, provided they meet specific conditions — regardless of where the fund is domiciled. The key conditions are:

I. The structure must constitute a "fund." It is essential to assess whether your chosen structure complies with the definition of a "collective investment scheme" under the Securities and Futures Ordinance.

II. All transactions of the fund must be carried out through an entity holding a Type 9 SFC license in Hong Kong.

III. The fund's portfolio must consist of assets classified as "securities" as defined under the Securities and Futures Ordinance.

It is worth noting that conditions (I) and (II) are relatively straightforward. Condition (III), however, introduces uncertainty for crypto funds. It is therefore critically important to exercise caution when determining whether your virtual asset portfolio falls within the definition of "securities" under the Securities and Futures Ordinance.

Mancun Law Summary

Setting up a crypto fund in Hong Kong presents significant opportunities but requires careful navigation of a complex regulatory landscape. Understanding the distinct roles of the fund manager, fund management company, and fund product is paramount. Fund management companies can successfully operate crypto funds by complying with SFC regulations, selecting appropriate custodians, and maintaining transparent communication with investors. As the virtual asset landscape continues to evolve, staying current on regulatory changes and market trends is essential for long-term success.