As in many areas of business, Singapore and Hong Kong are competing for dominance in Asia's fast growing hedge fund industry, with the Lion City trying to attract new managers through easier registration procedures and greater tax clarity. But the two centres are in competition for business not only with Tokyo but Sydney, London and New York.
Singapore and Hong Kong have been competing for decades for the title of the principal business hub in Asia outside Japan, so it's no surprise to find them going head to head to attract hedge fund managers seeking to capitalise on a global surge of demand for products focusing on the region.
Hedge fund managers, service providers, researchers and consultants say that, belying the country's popular international reputation for caution and excessive rule-making, the financial regulator, the Singapore Monetary Authority, has put in place an attractive and flexible legal and regulatory environment that has been increasingly successful in luring new managers to the region, especially startups.
Hong Kong has a longer history as a centre for hedge fund management and services and still enjoys a lead over its rival to the south, but industry observers say its competitive position has been undermined, at least temporarily, by a slow and bureaucratic approval procedure for new firms and by uncertainty over the tax status of fund management firms that is only now being resolved.
However, the two jurisdictions are far from the only options for managers investing in the region. Indeed, together with Australia and Japan, they still only account for about 43 per cent of the assets of Asia-focused hedge funds; the UK and the US between them account for more than 50 per cent, according to Singapore-based hedge fund research firm Eurekahedge, although its researchers believe that the share of the industry located in Asia will rise in the next few years as local investors become a more important part of the market.
In a report last year, Eurekahedge identified the UK as the leading location for the head office of Asian-focused managers with 28 per cent of the market measured by assets, followed by the US with 26 per cent, Australia and Hong Kong with 16 per cent each, Japan with six per cent and Singapore with five per cent. In 2004, around 40 Asian start-ups made their home in London and 19 in Singapore, the best score within the region. There were 13 start-ups in both Hong Kong and Australia, the latter falling sharply from 27 the previous year.
Drawing on data from Eurekahedge and other sources, Singapore-based hedge fund adviser GFIA estimated in a report last November that 121 Asian-focused hedge funds had their decision-making centre in the UK, followed by 105 in China (mostly Hong Kong, but including a handful in Shanghai), 86 in Australia, 84 in the US, 61 in Japan, and 60 in Singapore. In addition to 26 funds managed from other jurisdictions including Bermuda, GFIA identified six funds in Malaysia, four in Taiwan and three each in South Korea and Thailand.
Says Robert Grome, the Asia Pacific leader for the Investment Management Industry Group at PricewaterhouseCoopers: 'In terms of overall infrastructure, the hedge fund administration business is bigger in Hong Kong. The prime brokers have more presence, and there are more hedge fund managers than in Singapore. However, the Singapore government has taken some useful initiatives to make the country more attractive as a hedge fund destination.
'Singapore has been a bit quicker and more nimble. They get harshly criticised, but strategically they saw the hedge funds business as being important before the Hong Kong government, which seemed a bit anti-hedge funds after the currency crisis in 1998. Singapore probably saw a fundamental change taking place in the funds industry from the long-only world to a different world of absolute returns.'
Grome believes it has taken time to educate people in the Hong Kong administration about the importance of the sector, but notes that policy is now on the right track. He says: 'The government has taken a long time to implement tax legislation to make the presence of the industry in Hong Kong more secure. Because the tax rules governing funds had not changed for many years, they gave rise to some real exposures for hedge funds operating out of Hong Kong. But by the end of the first quarter new legislation should be in place to provide more certainty for Hong Kong hedge funds.'
There's no black-and-white answer, Grome argues, to the question of which jurisdiction is currently more attractive. 'It's a very competitive landscape,' he says. 'Some managers choose to go to Singapore, some to Hong Kong. Some are driven by tax reasons, others by lifestyle reasons, by the quality of service providers, or by the strength of infrastructure on the ground. Some may be driven by what markets they want to play in. Managers targeting greater China or north Asia are more likely to set up in Hong Kong, but those playing the south-east Asian markets may prefer Singapore. Frankly, there's plenty of business for both jurisdictions.'
Singapore's efforts to smooth the path for incoming managers may be striking a chord with managers from outside the region who have decided to set up an Asian presence, according to Theo Splinter, managing director of Sydney-based Citco Fund Services (Australia). 'Traditionally Hong Kong has been the main hub, but it looks as though the regulator in Hong Kong is tightening regulation, while the regulator in Singapore is being more flexible,' he says.
'As a result, the US and European houses moving to Asia tend to set up in Singapore, because it's easier from a regulatory point of view. People acknowledge that Hong Kong is still the main centre in Asia for hedge funds, but they point out that Singapore is only a three-hour flight away.'
However, Splinter notes that Hong Kong still has the edge in terms of market infrastructure, and possible an advantage in terms of geographical location. He says: 'Hong Kong is midway between Tokyo and Singapore, and at the gateway to China, plus all the prime brokers are in Hong Kong. They are not all in Singapore yet, and for those that are, their offices are still not close to their size in Hong Kong.'
Colin Lunn, who is based in Hong Kong as head of sales and client relationship for Asia Pacific at HSBC's Alternative Fund Services, says: 'Hong Kong retains its place as the main centre and the place to be seen, but Singapore is picking up a lot more small managers, because it's more flexible and a lower-cost environment. This probably reflects recognition on the part of the Monetary Authority of Singapore that there's a place for hedge funds in the market, and that it's up to the regulator to focus its resources on systemic risk to the market rather than actual investments.'
The Eurekahedge report notes that while in both Hong Kong and Singapore managers are required to register as investment advisors before they are allowed to trade securities, there remains 'a startling discrepancy in processing time. While it takes a couple of weeks to register a startup in Singapore; it can take several months in Hong Kong.
'This is a big issue for Japan-located hedge funds as they need to have their trading offshore, and more and more are having their trading set up in Singapore rather than in Hong Kong. This lag in processing times has also much to do with the arrival of big American funds opening branches in Asia such as Tudor, Everest, Moon Capital and most recently, the USbased USD2 billion fund, Tribeca, started by Citigroup, which chose Singapore to be its Asian headquarters.'
The firm argues that the cost of accounting, audit, tax and legal services, marketing and human capital placement remain significantly lower in Singapore than in Hong Kong. For example, the report says, Singapore legal costs for a simple application for exemption from the standard investment management licensing procedure can be obtained for between USD6,000 and USD8,000, while a full-blown licensing application from Hong Kong would probably require experienced legal advice costing USD15,000 or more.
'In terms of localised presence, most of the experienced institutional Asian hedge fund professional expertise such as prime brokers and administrators has stronger operational bases in Hong Kong,'
Eurekahedge says. 'However, there is a growing trend of human capital shifting into Singapore as well as strengthening local branch services. HSBC's alternative fund services, for example, have a strong and fully manned and serviced branch in Singapore, as do the Singapore offices of PricewaterhouseCoopers and Ernst & Young in relation to fund audit.'
According to GFIA principal Peter Douglas, Singapore's more technocratic approach to policy-making may have served it well. He says: 'The MAS has made a huge and largely successful effort to engage with the industry, with regulation that allows the industry to function without throttling it.
'Hong Kong has been slightly more confused in its execution. It's much more difficult to execute a concerted policy because of a political environment that we don't have in Singapore, where there is an administration but no real politics. Once policy is determined, it can be carried it out much more easily.'
Says Allan MacLeod, the head of hedge funds at Edinburgh-based asset manager Martin Currie who previously spent 10 years in Singapore: 'There's always been a Hong Kong-Singapore rivalry. Hong Kong was the dominant centre, but in the run-up to [the territory's handover to China in] 1997 a lot of people were expected to flee down to Singapore. A few people did, but I suspect Hong Kong will remain in a very strong position, especially as it's obviously the gateway to China.'
However, MacLeod is not convinced that hedge fund managers necessarily need to choose either centre. He says: 'Martin Currie successfully runs about USD20bn in assets from the UK, of which well over half is invested into Asia, so we firmly believe you can do it from outside the region. We travel a lot, and we have a lot of companies coming through Edinburgh. There is no discernable benefit to being there on the ground.'
However, he admits that there is one exception to the rule. 'The one market that's different is China, where we have an office in Shanghai and a team on the ground specialising in the domestic Chinese market.
It is very under-researched and inefficient, and has just opened up to foreigners, who are still only a tiny part of the market. So we have a team on the ground to ensure we get decent coverage. But everything else we do from the UK.'
MacLeod is echoed by Julian Mayo, investment director of London-based Charlemagne Capital, who says: 'As bottom-up stock-pickers, our time is spent researching companies, talking to them, and going through spreadsheets. We talk to each of the companies in our portfolio or watch list four times a year, either here, through conference calls, or on the ground. Some people ask whether it would be better to be in Hong Kong or Singapore, but with the best will in the world, there's a limit to the number of times you can see a company. In addition, being in London helps from a commercial perspective because we're close to our clients.'
HSBC's Lunn notes that managers who previously managed Asian investments from outside the region are now establishing a local presence. He says: 'There are managers who believe that being close to the investors is still what counts, but they are developing their Asian bases as well. More than 60 managers are now opening up in Asia. In any case, Asian investors constitute a growing segment of the market.'
Andrew Mascall-Robson, commercial director at Fortis Prime Fund Solutions (Asia) in Hong Kong, says the established US and European funds are simply recognising that 'there's nothing more effective than being on the ground. With funds of funds it may be different, but for being in the right time zone, for company visits, getting a handle on who's doing what, there's nothing like being in the middle of the action.'
PricewaterhouseCoopers' Grome believes that the trend will accelerate as capital markets expand and the range of opportunities available to managers opens up. He says: 'They'll come to this time zone, because the more there is to invest in, the more people need to be closer. Stock-pickers need to be here to do company visits and get to know the management. It may be possible to manage fixed income from a more remote base, but with equity-related product, you have to be on the ground to understand the culture and how these markets operate.'
GFIA's Douglas agrees that the dominance of London has at least levelled off and is likely to diminish in the future. He says: 'Singapore's advantage is that it is as close to a perfect location for a knowledge-driven business as it's possible to get; Japan's growth, despite its high direct and frictional costs, is probably attributable to the world's renewed appetite for Japanese assets, as well as the increased social acceptability of entrepreneurship in Japan. The rate of manager formation has begun to pick up again in Australia, in particular of managers offering offshore product.
'London remains the global centre for Asian hedge fund management, [but] in the future, London and the US will lose market share as the empirical evidence of better returns from indigenous managers becomes clearer, [while] the ratio of managers between Hong Kong and Singapore will remain broadly constant. The number of managers based in Tokyo will increase very significantly, and we will see more managers in 'peripheral' locations such as Korea and Taiwan.'