Fore Elite Capital: How to do a compliant cryptocurrency fund in Hong Kong?

Mar 03, 2023

This article is an interview with Fore Elite Capital CFO Wing Tan

Ask : Could you please provide some information about Fore Elite Capital’s history, status, and future development plans?

Wing Tan: Fore Elite Capital Management Limited (“Fore Elite Capital”) is an asset management company founded by Mr. Ejoe Ye in Hong Kong in 2017. This year marks Mr. Ye’s 14th year in the hedge fund industry. The name “Fore Elite Capital” comes from Mr. Ye’s first job as an analyst at Fore Research, founded by Mr. Matthew Li Yanxiu in New York, after graduating from Columbia Business School. Mr. Li’s Fore Research was the earliest and most successful hedge fund founded by Chinese people on Wall Street, with a multi-strategy that focused on CB Arbitrage. Mr. Matthew Li Yanxiu is considered a benchmark of Chinese entrepreneurs on Wall Street, so Mr. Ye added ‘Fore’ to the company name as a tribute to Mr. Matthew Li.

In 2019, Fore Elite Capital began to apply for the SFC license uplift regarding 100% virtual asset management and was officially approved by the Securities and Futures Commission (the “SFC”) in January 2022. In March 2022, Fore Elite Capital launched its first 100% virtual asset fund. In February 2023, Fore Elite Capital obtained the second uplift approval from the SFC, making it the first regulated fund manager managing a multi-strategy virtual asset hedge fund in Hong Kong. Despite significant fluctuations in the global virtual asset market in 2022 due to the collapses of Luna and FTX, the 100% virtual asset fund managed by Fore Elite Capital was still able to distribute considerable cash dividends to its investors in a difficult market, boosting confidence regarding the virtual asset industry in the traditional finance sector.

Fore Elite Capital’s roots in the traditional hedge fund industry and its early regulatory approval give it a unique advantage in helping traditional financial institutions enter the virtual asset industry in a compliant manner. Bitcoin has been around for less than 15 years, and the virtual asset industry, especially virtual asset management and hedge funds, is still in a very early stage. Since very few virtual asset industry participants come from traditional financial institutions, there are certain limitations for the industry players to connect with large traditional financial institutions as they don’t understand their needs. When traditional financial institutions are selecting asset management partners, they have strict criteria. These criteria, also known as “hard lines,” include compliance, a proven track record, and a credible team and investment strategy.

Compliance means that the asset management company must meet regulatory, and counterparty demands in a comprehensive manner, covering all aspects of the business, from risk management and legal compliance to accounting and auditing, fund administration, research and trading, investor relations, and fundraising. This requires meticulous attention to detail and significant investment of resources.

A proven track record is also essential. Virtual asset management companies cannot afford to be opportunistic as traditional financial institutions enter the virtual asset market. They must demonstrate their competence and reliability over time with established performance records. This is especially important as insiders in the industry understand the rules, while outsiders only observe from a distance.

Finally, a credible team and investment strategy are necessary for long-term success in the virtual asset management industry. These three hard lines serve as tickets for virtual asset management institutions to do long-term business.

With years of experience, Fore Elite Capital should have met these hard lines. Moving forward, Fore Elite Capital will continue to work hard to lead the industry and act as a bridge to connect traditional financial institutions with the virtual asset industry.

Ask: How are virtual asset funds are regulated under the licensing system in Hong Kong, and what are the similarities and differences compared to the United States and Singapore?

Wing Tan: For Hong Kong: Fund managers who engage in asset management activities in Hong Kong are regulated by the Securities and Futures Commission (SFC) of Hong Kong. Depending on the type of business they engage in, fund managers may need to obtain different types of licenses, but at a minimum, a Type 9 license (Asset Management) is required. The SFC regulates fund managers and fund products based on the “Securities and Futures Ordinance”, “Fund Manager Code of Conduct”, and other rules and regulations. These laws and regulations apply to all fund managers for various investment targets.

In October 2019, the SFC issued a “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets,” which is a significant turning point for Hong Kong’s attitude towards virtual assets. The key point is that if the proportion of virtual asset investment in a licensed institution’s fund exceeds 10%, it needs to obtain approval from the SFC to manage the virtual asset investment. Fore Elite Capital was one of the first asset managers to submit the application, and it took almost two years for Fore Elite Capital to officially become one of the few regulated licensed managers managing and distributing 100% virtual asset funds in Hong Kong. However, virtual asset funds can only be provided to professional investors due to existing laws and regulations.

Singapore: Unlike Hong Kong, there is only one regulatory authority in Singapore that regulates different financial activities. In Hong Kong, the Hong Kong Monetary Authority regulates banks, the Insurance Authority regulates insurance, and the SFC regulates securities, futures, and fund companies. However, in Singapore, the Monetary Authority of Singapore (MAS) regulates everything. MAS mainly regulates fund managers who set up funds in Singapore based on the “Securities and Futures Act”. Fund managers also need to obtain licenses from the MAS, and the licenses vary based on whether the fund is aimed at accredited investors, the size of AUM, the number of investors, or the investment type. The main licenses are Registered fund management companies (RFMC) and licensed fund management companies (LFMC). However, RFMC has more restrictions than LFMC, so applying for an RFMC license may be relatively easier.

Unlike Hong Kong, Singapore has not issued any laws or regulations specifically for managing virtual assets. Therefore, theoretically speaking, the requirement of managing virtual currency funds is the same as managing other traditional funds, and no additional uplift is required. However, due to the relatively relaxed regulations in the past and a series of incidents in 2022, the Singapore government and MAS have become more conservative in their attitude towards cryptocurrencies. Therefore, it cannot be said that Singapore is more crypto-friendly or easier to obtain a license than Hong Kong.

United States: US Regulation of hedge funds, including digital asset funds, is conducted at two levels: the issuer level and the adviser level. At the issuer level, the SEC and individual states regulate investment into the fund by US fund investors. If the fund meets certain exemptions under the “Securities Act” and “Investment Company Act”, it may not need to be regulated and registered. For example, whether the fund is only for professional investors, whether it is for US residents, and whether the number of fund investors is limited, etc. At the adviser level, managers are regulated by either the SEC, CFTC, or neither based on whether the portfolio assets are classified as securities or commodities. One of the important regulations is the “Investment Advisers Act”. Of course, there are also certain exemptions that fund managers can qualify for, such as the Venture Capital Adviser Exemption and Private Fund Adviser Exemption

Currently, there is a heated debate in the US regarding whether cryptocurrencies should be considered securities and which regulatory body should oversee them. The regulatory system is currently unclear, causing crypto fund managers in the US to be relatively passive and cautious. They are unsure whether they need to be regulated and registered, which has resulted in them managing funds based on exemptions. This, in turn, has limited the expansion of fund sizes to some extent.

It’s important to note that the above only applies to companies that manage virtual asset funds in a compliant way and does not apply to various P2P and fraudulent trading platforms. To gain a deeper understanding of this topic, it is highly recommended to consult professional lawyers or advisors for interpretations of different legal jurisdictions.

Ask: What do you think of Hong Kong’s current policy supporting WEB3, and what opportunities and limitations might it bring to the industry after compliance?

Wing Tan : Overall, Hong Kong’s support for WEB3 is positive both for the industry and the city. Clear regulatory frameworks have given everyone the confidence to know what can be done, and policy advancements represent long-term support, indicating sustainable development. This can attract more people and funds to stay or return to Hong Kong. In this regard, we greatly admire the courage of the Hong Kong government and regulatory agencies, who are clear in expressing their support and how to support it, leading the world in this aspect.

Regarding opportunities, with a clear policy direction, everyone can expand their business without hesitation or fear of non-compliance. Of course, some players may weigh the costs and benefits and choose to exit the Hong Kong market, as compliance costs can be significant, and some may be willing to pay while others may not. Compliance provides a better environment for long-term virtual asset participants.

Ask: From a fund perspective, how to view the macroeconomic trend in 2023 and its impact on cryptocurrency? What are the opportunities and risks?

Wing Tan : The market’s attention and interpretation of the macro economy has been adequate for this cycle, especially in the past year when it was dominated by macro factors and β played a more significant role than α. However, this year is not likely to be similar to the previous year for two reasons. Firstly, the market has already fully priced in the macroeconomic outlook, and unless there is another unpredictable Black Swan event like the Russia-Ukraine war, there will be limited changes. Secondly, the global liquidity tightening, which was the most intense, has already passed, and the marginal impact has decreased. Thus, the importance of α has increased. To identify α in the crypto market, we will focus on projects that have innovative and improved fundamentals.

Among the most prevalent opportunities are the LSD and layer 2 development on the Ethereum Shanghai upgrade, along with the emergence of the Bitcoin Ordinals protocol and its potential for NFTs. However, for Fore Elite Capital, the market’s fluctuations in hedge fund performance are just one aspect of the equation. Our strategy involves quantitative, event-driven, and fundamental approaches, with each part’s allocation being determined by volatility and volume. We are not highly sensitive to the macro environment. Therefore, even though Bitcoin experienced a 60% drop in 2022, Fore Elite Capital’s flagship fund still achieved a gain of around 10%.

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