The Evolution of Family Office Structures in Hong Kong: A Strategic Guide to Regulatory and Structuring Considerations. Part 2: Structuring Considerations

This is the second article in our two-part series examining Hong Kong's emerging family office landscape. In our first article, we explored the regulatory considerations and tax concessions for family offices operating in Hong Kong, highlighting the disconnect between the tax regime and regulatory requirements that necessitates careful planning. This second installment focuses on selecting the most appropriate investment vehicle structures to achieve operational efficiency, governance needs, and tax benefits while complementing the regulatory compliance strategies discussed previously.

Introduction

While many family offices have traditionally used simple special purpose vehicles (SPVs) to hold their investments, there is an increasing trend toward adopting more sophisticated fund structures that provide enhanced governance, operational efficiency, and potential tax benefits.

This evolution toward institutional-grade structures makes particular sense in light of the tax concession regime, which applies to specific FIHVs. By consolidating investments under thoughtfully designed structures, family offices can optimize cost and operational efficiencies while maintaining the flexibility needed for diverse investment strategies.

The selection of appropriate structures largely depends on investment types, liquidity requirements, governance needs, and overall family objectives. The three primary structural approaches available are open-ended structures, closed-ended structures, and hybrid models that combine elements of both.

Open-Ended Structures

Open-ended investment structures permit regular subscriptions and redemptions without a predetermined termination date. These vehicles function as "evergreen" investment platforms that can theoretically continue indefinitely. Since investors can enter and exit at regular intervals, open-ended structures are particularly well-suited for liquid investments such as publicly traded securities, bonds, and other readily marketable assets.

The operational mechanics typically involve a corporate vehicle that issues unitized interests (shares) based on periodically calculated net asset value (NAV). While corporate structures are most common, unit trusts and limited partnerships with unitized interests can also be employed, particularly when specific tax considerations necessitate alternative approaches.

Open-ended structures can be organized in several configurations, each with distinct advantages and considerations:

Stand-Alone Structure: A single investment vehicle with a commingled asset pool, typically using a corporate structure like a Cayman Islands exempted company.

Key features include:

• Single investment strategy and consolidated asset pool
• Unified fee structure and uniform investor terms
• Streamlined operational requirements
• Simplified documentation and governance framework

While this approach provides clarity and efficiency, it lacks the flexibility to accommodate different investor needs or segregate investment strategies. It may also be challenging to implement different fee arrangements or liquidity terms for different family members or investor groups.

Master-Feeder Structure: A sophisticated arrangement involving multiple feeder funds investing into a central master fund.

This structure provide significant benefits for family offices, including:

• Investor Segmentation: Different family members can invest through vehicles aligned with their regulatory and tax requirements without compromising the position of other investors.
• Tailored Terms: Each feeder can implement different operating currencies, fee arrangements, subscription terms, and liquidity provisions.
• Operational Efficiency: Pooling assets at the master level reduces duplicate agreements with counterparties and lowers overall transaction costs.
• Enhanced Access:  The increased asset base improves access to investment opportunities, preferential terms, and credit facilities that might be unavailable to smaller vehicles.

Umbrella Structures: An umbrella structure creates an overarching vehicle with multiple segregated sub-funds or cells, each maintaining its own distinct asset pool and liability profile. This approach allows substantial customisation while maintaining administrative efficiency.

The Cayman Islands Segregated Portfolio Company (“SPC”) represents a popular implementation of this concept. An SPC permits the issuance of separate share classes for each segregated portfolio, with statutory segregation of assets and liabilities between portfolios.

Key benefits of umbrella structures include:

• Asset Class Specialisation: Different cells can focus on specific asset classes or investment strategies.
• Investor Selection: Family members can participate selectively in specific investment opportunities rather than being committed to a blind pool approach.
• Simplified Expansion: New investment portfolios can be added as cells without establishing entirely new entities, reducing documentation complexity and costs.
• Liability Protection: Statutory segregation protects assets in one cell from claims against other cells, though this protection may not be universally recognised in all jurisdictions.

Closed-Ended Structures

Closed-ended structures are designed for illiquid investments, such as real estate or private equity, venture capital and infrastructure.  Unlike open-ended vehicles, these structures typically operate with fundamentally different economics and mechanisms.  For example, capital is committed upfront but drawn down over time as investments are identified; investors cannot freely enter or exit; fixed investment periods are followed by realisation or harvest periods; and distributions (primarily) occur upon investment realisation rather than through regular redemptions.

• Limited Partnership Structure: The traditional vehicle for closed-ended investments, offering flexibility, tax transparency, and efficient governance. Each investor in a limited partnership (“LP”) has its economic interests represented by way of individual partnership accounts, and a “share” in the fund’s economics by way of a partnership interests (LP Interest).

LPs can freely contract on the terms of a Limited Partnership Agreement without being subject to statutory restrictions or regulatory requirements (that would otherwise be applicable to a corporate structure). Therefore, family offices can set their own rules and procedures on all matters of the FIHV including admission and removal of partners, disposal of interests, capital contributions and withdrawals, priority, distribution of proceeds, life of the fund, permissible investments etc. 

Hybrid Structures

Hybrid structures accommodate both liquid and illiquid investments, offering flexibility to meet diverse family office needs. These may combine features of open-ended and closed-ended vehicles.  The umbrella structure lends itself to hybrid strategies because “sub funds” or “cells” can be easily created to house different portfolios (eg, real estate in one fund, liquid securities in another).  

Two different structuring options may be considered for a hybrid structure:

Mixed Cell Approach

In this model, the overarching framework is deliberately flexible, allowing each cell to operate with distinct terms and mechanisms. Some cells function as traditional open-ended funds with regular subscriptions and redemptions, while others operate as closed-ended vehicles with commitment periods and distribution waterfalls.

This approach offers maximum customization but introduces substantial complexity. Despite these challenges, the mixed cell approach provides unparalleled flexibility for family offices with diverse investment strategies ranging from liquid markets to direct private investments.

Modified Open-Ended Approach

This alternative approach begins with an open-ended corporate structure but incorporates extended redemption restrictions or "hard locks" for illiquid investments. Different share classes are created with varying liquidity terms based on the underlying investment characteristics.

While less customizable than the mixed cell approach, the modified open-ended structure offers greater operational efficiency and reduced complexity, making it particularly suitable for family offices with primarily liquid investments but occasional illiquid opportunities.

Hong Kong Domiciled Structures

Hong Kong has recently introduced two fund structures of its own that have seen a rapid gain in popularity among asset managers looking for viable and cheaper alternatives to the Cayman Islands structures.  

Open Ended Fund Companies (OFC)

Introduced in 2018 under the Securities and Futures (Amendment) Ordinance 2016, the OFC represents a corporate vehicle with variable capital structure, free from the capital maintenance restrictions that typically apply to standard companies. A significant limitation for single family offices is that OFCs require an SFC-licensed investment manager (holding a Type 9 regulated activity licence). This requirement makes OFCs more suitable for multi-family offices that already maintain SFC licenses rather than single family offices seeking to avoid licensing requirements.

Limited Partnership Funds (LPFs)

Established in 2020 through the Limited Partnership Fund Ordinance (Cap. 637), the LPF provides a modern limited partnership framework closely aligned with international standards but with distinct Hong Kong advantages.

Key benefits include:

• No need for a Type 9 Licensed manager in order to be established – although this does not automatically mean that the GP or manager of the LPF does not need a licence in HK – this will depend on whether it is carrying out any regulated activity or is able to rely on any exemption from licensing;
• Streamlined registration process without SFC approval
• Flexible governance through the limited partnership agreement
• Simplified establishment and maintenance procedures
• Substantially lower setup and ongoing costs compared to offshore equivalents

The LPF can be adapted for both traditional closed-ended structures and modified open-ended arrangements through unitisation of partnership interests, making it versatile across different investment strategies. This flexibility together with the need for a mandatory Type 9 manager for establishment, makes the LPF particularly appealing for single family office structures.
In addition to those mentioned above, there are some other key advantages to using HK structures for FIHVs: 

Conclusion

Hong Kong’s family office framework reflects a strategic commitment to cementing its position as a leading global wealth management hub. By leveraging a combination of targeted tax incentives, pragmatic regulatory frameworks, and innovative structuring options, the city offers compelling opportunities for family offices seeking a stable and efficient base in Asia.

While navigating Hong Kong's family office landscape requires careful consideration of multiple factors, the territory's supportive framework offers substantial rewards for well-structured operations. As global wealth continues its eastward shift, Hong Kong's positioning as a family office hub places it at the center of one of wealth management's most significant growth opportunities.

For more information, please reach out to our key contacts in the Financial Services Regulation & Funds international team: Gaven Cheong, Charlotte Hill, Racheal Muldoon, Charlie Ring and Jeremy Bell.

For the first part of the series, read more here.