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Start-ups help Singapore gain in rivalry with Hong Kong

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Hong Kong may remain the main Asian centre for hedge funds outside Japan, but its perennial rival Singapore is steadily gaining ground, thanks in part to a relaxed regulatory regime for managers th

Hong Kong may remain the main Asian centre for hedge funds outside Japan, but its perennial rival Singapore is steadily gaining ground, thanks in part to a relaxed regulatory regime for managers that belies the city-state’s reputation for excessive state control and indeed has sparked a certain degree of concern among investors worried about lack of supervision.

According to Singapore-based research firm Eurekahedge, Hong Kong-based managers ran 15 per cent of hedge funds that invest in Asia at the end of last year,  compared with 10 per cent for Singapore, but it was Singapore that dominated new launches with 24 start-ups compared with six in Hong Kong. Singapore has benefited from regulatory provisions under which managers whose funds have no more than 30 qualified investors are exempt from the requirement to obtain a  Capital Markets Services licence. This enables hedge funds to be set up in Singapore in as little as a week, whereas obtaining a licence to operate as a hedge fund manager in Hong Kong can take as long as four months.

On April 3, Singapore had 347 exempt fund managers, according to the financial industry regulator, the Monetary Authority of Singapore. However, a number of  investors including funds of hedge funds and US pension schemes are reported to have asked the Singapore government to tighten the rules for fund managers, concerned that the lack of regulation makes the jurisdiction vulnerable to episodes like the 2005 closure of the Aman Capital Global Fund following losses on derivatives trading. Industry participants say Singapore has been the prime beneficiary of regulations in other Asian markets that discourage hedge fund managers from setting up their operations in the country where their investment is focused. According to Peter Douglas, principal of Singapore-based consultancy firm GFIA, managers investing in jurisdictions such as India, Japan and Korea may have a local presence but their management company is
elsewhere, usually Singapore.

‘Singapore has been very aggressive about making it very easy to get authorised there,’ says Stuart Farr of Beauchamp Hedge Fund Solutions. ‘It certainly doesn’t hurt that you can get authorised effectively overnight, and while it’s not that hard to register in Hong Kong either, it’s a marginal benefit. In addition, the tax rate is lower in Singapore, and there’s more availability of office space, although rents have been going up because there’s so much demand.

‘Historically labour has been cheaper in Singapore, which has a well-educated, relatively experienced financial workforce that is on a par with that of Hong Kong. There are also travel costs – flying through Singapore is often cheaper than Hong Kong. For a fund manager the chances of company visits exclusively taking place in Singapore or Hong Kong are pretty slim, so you will have a lot of travel expenses. And there are also lifestyle benefits. Hong Kong is a more vibrant place in which to live, but if you have a family, Singapore is a bit more liveable.’ While many hedge fund service providers have remained faithful to Hong Kong as the traditional centre for hedge funds outside Japan, Singapore is starting to gain traction, insiders say, as a hedge fund administration centre. Earlier this year Custom House Administration, a niche Dublin provider that also has a presence in Chicago to serve the US market, opened its Singapore office. Custom House chairman Dermot Butler notes that for administrators at least, the cost equation is tilted firmly toward Singapore. ‘Costs in Hong Kong are horrendous,’ he says. ‘They are not so horrendous in Singapore, which is currently the least expensive of our three locations, followed by Chicago and then Dublin, which is now very expensive to operate in.’ However, he notes that despite the recent surge in hedge fund start-ups in the
Lion City, Hong Kong retains the advantage of its proximity to China.

PerTrac Financial Solutions opted for Hong Kong for its first office in Asia, says chief executive Gerry Mintz, because of the established weight of existing and potential customers for the asset allocation and investment analysis software provider, although he does not rule out a presence in Singapore (or Sydney) in the future if and when the firm’s business warrants it. ‘It was logical to put our people on the ground in Hong Kong to start with, because we felt that it currently offered more on the investor side and maybe a bit more critical mass among prime brokers, capital introduction groups and others,’ he  says. ‘And obviously it has a meaningful number of new hedge funds, although Singapore is getting pretty important too.’ Christophe Lalo, regional head of marketing for Asia-Pacific hedge funds with Société Générale Asset Management Alternative Investments in Hong Kong, believes the rivalry between the two jurisdictions is overblown. ‘Each centre has its own benefits, and I wouldn’t say one is better than the other,’ he argues. ‘It’s just like Luxembourg and Dublin, or Cayman and Jersey. There’s no real difference between Tokyo, Sydney, Hong Kong and Singapore. There is room in the market for all the Asian centres.’

Kevin Meehan, head of Asia-Pacific prime services coverage with Credit Suisse in Hong Kong, adds: ‘There’s a lot of discussion about Hong Kong versus Singapore, but the four jurisdictions where hedge funds tend to be based in Asia should really be neutral from the perspective of a prime broker, which should be looking to service clients in each of those locations.’ Meehan says Credit Suisse decided on Singapore as the best option to place its operational infrastructure in the region, in order to meet the challenge of ‘providing a high-touch service to clients wherever they are based. We have something like 50 operations people and 40 IT people serving not only Asia but our European platform. We have client-facing staff in each of Hong Kong, Tokyo and Australia, while our operational team in Singapore is also organised on client rather than functional lines.’

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