By James Williams – As the US and Europe prepare to impose regulatory shackles on hedge fund managers in response to the financial meltdown of 2008, Singapore has, for many, emerged as a pillar of pragmatism with no knee-jerk reactions, just a sensible, measured approach.
Admittedly, there was some initial confusion as its regulatory body, the Monetary Authority of Singapore (MAS) deliberated over what to do, canvassing public opinion on how best to move forward. This resulted in some funds upping sticks and setting up shop in Hong Kong instead. Consequently, start-up numbers fell some 13 per cent in 2009.
This uncertainty, however, was cleared up last April when MAS announced new licensing provisions. The result? Start-up numbers increased (approximately 24) and Singapore’s alternatives AUM grew to USD21.55bn compared to USD17.64bn in 2009. Multi-strategy, macro and equity long/short made up the majority of start-up strategies, with established global heavyweights like Fortress Investment Group and SAC Capital choosing to open offices there, the latter in 2009.
In one fell swoop the rules of engagement were clarified: Boutique start-ups with less than SGD250 million in AUM, paid-up capital of SGD250,000 and fewer than 30 qualified investors could now chose whether to be licensed (CMS, or Capital Markets Services license) or not, provided they did so by writing to notify MAS.
Under the new provisions, all fund management companies would be subject to additional safeguards including placing investors’ monies with licensed custodians in the jurisdictions where those monies were held. Independent fund administrators would also need to be used whilst CMS holders would also need to have compliance officers commensurate with their size of operations.
“People wanted something more reassuring from regulators and ensure that hedge funds couldn’t practice too much regulatory arbitrage by setting up shop in friendlier jurisdictions,” says Melwyn Teo, Associate Professor of Finance, Singapore Management University and MD of the BNP Paribas Hedge Fund Centre.
“So far we haven’t seen too many spectacular blow-ups in Singapore, so I don’t think there’s any major concern, but its still comforting from an investor’s perspective that there’s someone watching over fund managers’ shoulders. It’s good that MAS resolved the regulatory uncertainty,” adds Teo.
For any credible manager, Singapore’s regulatory framework has remained largely unchanged according to Peter Douglas, principal of GFIA Pte, a hedge fund advisory firm.
“Singapore’s was one of the few regulators globally that had properly understood alternatives, pre-crisis, and had established a pragmatic regime. There’s some tightening of requirements, especially for mid-tier managers, and the “brass-plate” management companies have largely been eliminated, but the philosophy and approach to regulation is unchanged,” notes Douglas.
Industry feedback during last year’s consultation was by and large positive according to MAS. “The majority agreed with our approach of calibrating the level of regulatory andcapital requirements for different categories of fund managers, based on the size and complexity of their businesses, the sophistication of their clientele, and their potential market impact,” confirms a MAS spokesperson. In response to this feedback, MAS issued a paper in September 2010.
Its reasoning behind the new provisions was to enhance the regulatory regime for fund management companies and Exempt Fund Managers (EFMs), ensuring it remained responsive to the investors’ changing needs – an approach MAS considers essential for the long-term growth of Singapore’s fund management industry.
Although widely applauded as progressive, the regulatory improvements mean that start-up costs have unavoidably risen. Michael Coleman, Chairman for AIMA Singapore and MD of Aisling Analytics - whose USD1.5billion Merchant Commodity fund is one of Singapore’s biggest – was quoted last year as saying: “It’s a double squeeze for start-ups. The bar has been raised both by the regulators and investors.”
Not everyone is happy. Tan Choon Leng, Partner, Corporate & Securities Laws at Singapore law firm KhattarWong, notes that some of the firm’s clients’ sentiments are mixed with a degree of concern. “As you know MAS is going to impose an AUM cap of SGD250million on start-up EFM holders. Many funds were concerned that they would breach it quite quickly and thereby need to move up to the next category which brings with it greater compliance and regulatory obligations,” comments Tan.
Fears aside, Singapore is looking ahead. MAS won’t worry about fund managers losing their EFM status because the licensing provisions are based on relative size of fund AUM.
“In Q2 2011, MAS will consult the industry on draft legislative amendments, which will take effect in the second half of 2011,” the MAS spokesperson confirms.
Around the same time these industry provisions were being discussed, post ’08, regulators embarked on an auditing blitz of all the city’s exempt fund managers. Even though they were, ostensibly, separate exercises, it’s probable the two were inter-related. The reason for the audit was to see how compliant exempt fund managers were with their existing licensing regime. It was around this time that the consultation paper proposing regulatory tightening was released. A clear sign, then, that MAS was being proactive in its response to the global financial crisis.
As a fund jurisdiction, Singapore is well positioned for smaller start-ups, compared to say Hong Kong, because costs are lower. Teo doesn’t see these new provisions being too onerous: “It’s all about shielding funds from over-regulation because for these guys the compliance costs can be quite high relative to their asset base.” The bigger the fund, the easier it is to absorb the costs of recruiting compliance officers. It seems a very fair approach.
The jurisdictional debate often centres on whether Singapore is better than Hong Kong. In essence, though, there’s nothing to choose between the two other than that the licensing process in Singapore is somewhat faster and all funds in Hong Kong have to register themselves, regardless of size. “I don’t think it needs to be a case of “Us versus them”, says Yang Eu Jin, Partner, Corporate & Securities Laws at KhattarWong. “Both jurisdictions are big enough to absorb all these new fund managers.”
Both are also well placed to serve different markets: Hong Kong, being the gateway to China, typically attracts equity long/short managers. Singapore, points out Teo, “attracts more macro funds because we’re a currency hub”. It also has a more prominent private banking industry.
Funds of all strategies exist in the Lion City, with Douglas admitting that “recently we’ve seen a mini-renaissance in unconstrained long equity strategies”, but its location does lend itself favourably to those seeking growth opportunities in Asian powerhouses like Indonesia, Thailand and India.
One trend that Tan has picked up on is the bigger funds choosing to have offices in both locations: “In Hong Kong they tend to be more China-focused with many looking at pre-IPO and consumer driven opportunities whereas the ones based here tend to have a Southeast Asian focus. It always used to be Asia ex-Japan. It could well be Asia ex-China in future.”
Singapore’s tax regime is also very attractive to fund managers. Currently, the tax rate is 10 per cent on performance fees subject to MAS approval. As a leading financial centre, anti-money laundering regulations are strict, the socio-political environment is stable and its economy is one of the region’s most robust. Singapore also has extensive IT and telecommunications networks.
From an operational viewpoint, the cost of establishing and running funds is relatively low. “Many global players have cited the relative ease of setting up businesses and our cost-competitive environment as the main draws of starting up their businesses in Singapore,” confirms the MAS spokesperson. “There’s a diversity of new entrants in Singapore and I think that’s going to make it very exciting going forward,” notes Teo.
These are all important “hard” factors, but there are “soft” options that count in Singapore’s favour, most notably the quality of life. Crime is very low. There are plenty of international schools for children, not to mention a plethora of shopping opportunities. It has all the cosmopolitan flair of any major city.
Nevertheless, it would be folly to think of it as a perfect jurisdiction. Unlike Hong Kong, it doesn’t have the world’s second largest economy neighbouring it. This makes asset-raising somewhat tougher. “The challenge isn’t the regulatory but rather the capital-raising environment,” says Teo. “We don’t really have a hinterland, China isn’t in our backyard.” He believes this is the biggest worry facing Singapore because in Hong Kong “there’s a lot more going on”. But that could change if private banks begin to increase their allocations into alternatives.
Douglas concurs with Teo by admitting that, generally, “asset-gathering” funds tend to congregate more in Hong Kong where the capital markets flow is stronger: “Singapore suits those managers that prefer to concentrate on more osmotic asset accumulation.” In his opinion, Singapore has more of a clear edge on jurisdictions like Japan, India and Korea that are less favourable to boutiques.
Singapore’s robust supervisory framework and pro-business environment have attracted leading financial institutions and global investors to operate there with confidence. As regulatory uncertainty persists in the West, the more attractive a jurisdiction it has become, with MAS confirming that it continues to see increased interest from both overseas and indigenous fund managers looking to set up there and “benefit from the Asian growth story”.
“Singapore’s regulatory environment is driven by prudence and appropriate industry policy, not by politics, and it’s therefore a much more stable environment than either the US or Europe,” concludes Douglas.