- Why Is Concentration Management So Critical?
Concentration limits ensure funds can buy, sell, and absorb losses—preventing single-holding or counterparty failures from destroying an entire fund while preserving liquidity for subscriptions and redemptions. Regulators therefore monitor equities, cash deposits, derivative counterparties, and even hidden risks from OTC contracts. - Regulatory Scope: Who Must Comply and Who Is Exempt?
| Product Type | Target Investors | Subject to UT Code Ch. 7? | Notes |
|---|---|---|---|
| SFC-authorised public funds | Retail public | Yes—must comply | All limits below are based on this |
| Private/OFC/LPF (professional only) | Professional/institutional | Generally exempt | May serve as internal reference |
| MPF, PRF & other pension funds | Retail/employees | MPF rules apply | Also 10% single-entity cap |
- Seven “Hard Limits” — Core Concentration Rules
| # | Clause | Limit | Regulatory Logic & Practical Tips |
|---|---|---|---|
| 1 | 7.1 | Single entity ≤ 10% NAV | Stops “one bad apple.” Derivatives look-through; centrally cleared exempt. |
| 2 | 7.1A | Same group ≤ 20% NAV | Avoid hidden related-party risk. |
| 3 | 7.1B | Cash deposits ≤ 20% NAV | Same bank/group; temporary breach at inception, liquidation, large flows. |
| 4 | 7.3 | Unlisted/OTC assets ≤ 15% NAV | Controls illiquidity. |
| 5 | 7.2 | Ordinary shares ≤ 10% per issuer | Prevents over-influence. |
| 6 | 7.4-7.5 | Government/Public: 30% + 6-issue rule | ≤30% NAV per issue; full gov-bond books need ≥6 issues. |
| 7 | 7.3A | SPVs & OTC counterparties consolidated | Wholly-owned SPVs, OTC net risk count toward 10%/20%. |
- Deep-Dive into Regulatory Logic
- Horizontal diversification — 10%/20% caps confine single-default losses.
- Vertical diversification — 15% unlisted + 30% gov-bond quotas enable quick liquidation.
- Cash-pool control — 20% cap spreads banking risk; regulators allow brief overruns for large flows.
- Six Key Compliance Practices
- Portfolio Building: Dynamic Monitoring + Buffers
- Warning lines at 8%/18% below hard caps.
- Look-through tools for structured notes & TRS exposure.
- Derivative & Counterparty Management
- Counterparties must be “substantial financial institutions,” net risk ≤ 10% NAV.
- Collateral daily MTM, fully covered, diversified.
- Cash & Liquidity Contingency
- Maintain multiple banking/custody channels.
- Temporary 20% breaches require internal approval and records.
- Disclosure & Key Facts Statement
- Explain major concentration moves in semi-annual/annual reports.
- Highlight leverage or counterparty risks from derivatives.
- Alignment with Pension Rules
- MPF adopts same 10% cap; share frameworks across MPF/retail funds.
- Tech Trend: Digital Surveillance
- eMPF, ETF auto-reporting, real-time data feeds & alerts.
- Private Fund Flexibility & Self-Discipline
Private funds aren’t mandated to follow Ch. 7, but global institutions often adopt equal or stricter limits for future public offerings or MRF access. - International Benchmarks: UCITS vs. US ’40 Act
| Framework | Single Issuer | Same Group | Government Bonds |
|---|---|---|---|
| UCITS | 10% | 20% | 35% (100% if ≥5 issues) |
| US ’40 Act | No hard NAV cap | — | Relies on disclosure & board oversight |
Hong Kong takes a middle ground—UCITS alignment plus 30% + 6-issue flexibility suiting local liquidity.
- Conclusion: Compliance = Competitiveness
In an era of high rates and active cross-border flows, concentration rules are not mere red lines but gold badges proving stability + transparency. Embedding UT Code Ch. 7 into daily decisions and system monitoring turns compliance cost into a trust premium—Hong Kong funds’ pathway to global stature and mainland connectivity.
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Paradox Management Limited
Paradox Management Limited, established in 2010 in Hong Kong, specializes in vocational training and licensing support for the finance, banking, and insurance sectors. The company offers personalized training programs, including private sessions and group classes, as well as access to comprehensive exam question banks. Additionally, Paradox Management Limited assists with regulatory compliance, the acquisition and sale of financial entities, and obtaining Money Lender Licenses. Catering primarily to small financial institutions, the company is known for its deep industry expertise, client-focused approach, and proven success in helping professionals excel in their careers.
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