Incorporating alternative investments to enhance MPF diversification

Alternative investments include unlisted equity

As the name suggests, alternative investments differ from traditional assets like stocks, bonds, and money market instruments. Traditional investments typically offer better liquidity, higher transparency and are accessible to general investors through various channels. By contrast, alternative investments are usually managed by professional investors due to their complexity, lower liquidity, and reduced transparency. Common types include private equity and startup ventures, as well as real estate, hedge funds, commodities, collectibles, cryptocurrencies, private credit, and infrastructure projects.

Low correlation enhances diversification

One of the key attractions of alternative investments is their ability to improve overall portfolio diversification because they do not fit into the conventional equity/fixed income or cash categories, i.e. they are not correlated to traditional types of investment. Additionally, due to its lower market efficiency, investors may be able to capture extra value, with potentially higher returns. However, the lower liquidity of alternative investments also means longer timeframes for realizing returns, and often with higher risks and volatility. Moreover, many alternative assets are not publicly listed, making valuations more challenging due to limited transparency.

Regulatory framework in place

Earlier this year, the MPF Authority conducted a study on allowing MPF funds to invest in listed private equity funds. It is considering including individual private equity funds that are approved by the MPF Authority, recognized by the Securities and Futures Commission (SFC), and listed on the Hong Kong Stock Exchange as part of the MPF’s investment scope. Notably, there are currently no private equity funds listed on the Hong Kong Stock Exchange. However, the SFC issued a circular in February clarifying its requirements for approving closed-end funds that primarily invest in private and less liquid assets (i.e., alternative asset funds). One key criterion is that the fund must be of substantial size, with an expected market value of HKD 780 million (USD 100 million), and depending on its investment strategy, must have the ability to generate stable income.

Cap of 10% of fund NAV

With the regulatory framework now in place, the likelihood of private equity funds being included as MPF investment options is increasing. The scale and investment potential of the MPF could help attract private equity funds to establish themselves in Hong Kong, contributing to the growth of the local financial market. Since the MPF Authority limits the total amount of alternative assets to 10% of a fund’s net asset value, trustees are unlikely to launch standalone alternative asset funds. However, they may include alternative assets as a part of their fund portfolios. Members interested in investing in alternative funds should stay informed about related developments and trustee updates to prepare for future opportunities to indirectly invest in private equity funds through MPF schemes.