Singapore's New Hedge-Fund Regulation Puts City `Back on Map'

Date: Thursday, July 29, 2010
Author: Netty Ismail, Bloomberg

Singapore hedge fund startups are on the rise after the central bank approved new rules that didn’t impose a licensing requirement on most funds.

Seven new hedge funds set up in May and June, according to Eurekahedge Pte, after the Monetary Authority of Singapore said in April that small funds can keep operating without a license as part of its review. The number of new funds last year fell 13 percent to 26, the lowest since 2003, as uncertainty over pending rule changes kept managers away, according to data from the Singapore-based industry researcher.

“Singapore did not shoot itself in the foot by putting up proposals that will kill off the business,” said Kher Sheng Lee, a senior associate in the financial services group at Philadelphia-based law firm Dechert LLP in Hong Kong. “While some places are moving towards over-regulation with rigid rules and increase in compliance costs, Singapore has attempted to go for sensible regulation.”

Singapore is vying with Hong Kong for a slice of the global $1.7 trillion hedge-fund industry as the region’s growth leads the world. Singapore has made it easier for hedge funds to set up shop on the island than in other Asian cities such as Hong Kong, where hedge-fund managers face the same licensing requirements as mutual-fund managers.

New Rules

After consulting the industry since September, Singapore’s central bank proposed in April that managers with less than S$250 million ($183 million) and serving not more than 30 qualified investors will be able to choose not to be licensed by submitting a “notification” to the MAS. They and their bigger licensed counterparts will need to maintain a minimum base capital of S$250,000 and have at least two directors.

The regulator has recognized the needs of startups and smaller managers “not to be overburdened by regulatory costs,” said Michael Coleman, chairman of the Singapore branch of the Alternative Investment Management Association. Woodsford Capital Management Pte and Pure Capital Ltd. are among hedge funds being lured by Asia’s biggest hedge-fund center after Hong Kong.

The lack of clarity on Singapore’s rules throughout last year made relocation to the city-state a difficult decision and cost business, said Peter Douglas, the principal of GFIA Pte, which advises investors seeking to allocate money to hedge funds and runs a wealth management business on the island.

“The proposed changes will, and already are, taking off the brakes that were applied because of regulatory uncertainty,” he said. “Singapore is now fully back on the map as an attractive location for our industry.”

Growing Industry

Hedge-fund managers are currently exempt from holding a capital-markets services license provided they manage funds on behalf of 30 or fewer of what the regulator describes as “qualified” investors. They are still subject to local rules on securities and futures trading as well as money laundering.

Singapore’s hedge-fund industry grew to $43 billion at the end of 2009, from about $10 billion in 2005, according to the central bank. There were 320 hedge-fund managers in the city- state last year, compared with fewer than 20 before 2001, according to the MAS.

The number of hedge funds overseen by managers licensed by the Securities and Futures Commission in Hong Kong grew to 542, nearly five times the 2004 number, according to a September report from the regulator. Total assets managed by the industry stood at $55.3 billion as of March 31, 2009, representing six times the level in 2004, according to the SFC.

Hong Kong

While Singapore is attracting more interest with clearer regulation, it’s unlikely to overtake Hong Kong because of the latter’s “access to China-driven flow,” said GFIA’s Douglas.

Hong Kong’s securities regulator “has made minimal changes to its regulatory framework, which some will say is because it went into this crisis with better rules and thus did not have to resort to ‘knee jerk’ reactions,” said Christophe Lee, chairman of AIMA’s Hong Kong/China national group. He said he doesn’t expect “any dramatic changes in Hong Kong.”

By contrast, the European Union’s draft directive on alternative investment fund managers would limit borrowing by funds and may restrict European investors’ access to hedge funds based outside the 27-nation bloc.

U.S. lawmakers are proposing to require hedge funds that manage more than $100 million to register with the Securities and Exchange Commission, subjecting them to audits, and to provide information on trades so authorities can assess systemic risk.

Woodsford Capital

The review by the MAS, which acts as Singapore’s central bank and regulator, is the most comprehensive of the fund- management industry since the city-state introduced incentives to lure alternative asset managers in 2002.

The new rules still need to be legislated. Managers have about 18 months to meet the new requirements, the Singapore branch of AIMA said in a statement on April 29.

Woodsford Capital, which started a macro fund in May, chose to set up in Singapore as the increased regulatory oversight would “provide assurance for investors” after Bernard Madoff’s $65 billion fraud shook confidence in the industry, said Chief Executive Officer Zhijian Wu.

“Singapore has been as sensible and forward thinking as they can be about this,” said Peregrine Cust, founder of Prana Capital, which moved its investment team to Singapore from London in April. “It’s a very high-margin business, it brings lots of highly paid professionals into the local economy. It’s not going to take them that long to take this industry to critical mass.”

Revamping Strategies

Han Ming Ho, a partner at Clifford Chance, one of the first international law firms awarded a Singapore license, said he is handling more inquiries since the rules were announced.

“A lot of guys are revamping their strategies, a lot of them are kick-starting their processes which they’ve put on hold,” said Ho, who heads the law firm’s funds practice group in Singapore.

London-based Algebris Investments LLP, a $1.5 billion global financial hedge-fund manager, and Fortress Investment Group LLC, the $42 billion buyout and hedge-fund firm co-founded by Wesley Edens, have registered their offices in Singapore, according to the Accounting and Corporate Regulatory Authority, which regulates businesses in the city-state.

Singapore, where the top tax rate for individuals is 20 percent, is also attracting more managers after the U.K. increased the top rate of income tax to 50 percent and European regulators work on tougher rules. The island-state was named Asia’s most livable city in a Mercer Consulting survey in May.

Pure Capital, which uses computer models to pick trades, is “seriously considering” moving its head office to Singapore from London, with research and trading still in Wellington, New Zealand, said Chief Investment Officer Anthony Limbrick. The firm had planned to move more of its operations to London last year to be closer to investors.

“Europe is going to very much become the ‘old world’ and get left behind; the hedge-fund industry will move towards Asia- Pacific over decades to come,” Limbrick said. “We may yet be a year or two away, but we like Singapore’s attitude to encouraging new business.”

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net