As assets managed by hedge funds globally pass
the US$1 trillion mark, voices of the rational
shadows whisper that the industry is due for a
market correction. Yet fears of a bubble in the
industry may be unfounded at least from an Asian
perspective, which many see as an emerging opportunity-rich
sector essentially catching up with the US and
Europe in terms of strategy sophistication and
As western hedge fund markets mature and performance
rates dip, the wave of interest in Asia rises,
with Singapore and Hong Kong competing for the
lead as fund management hubs. The increased number
of new hedge funds entrants have also allowed
sophisticated investors to pick and choose based
not only on performance, but also to consider
the core business infrastructures of the funds.
This flows naturally to the move towards more
efficient use of start-up resources in enhancing
performance competitiveness, and away from fixed
start-up costs such as legal and tax that have
diminished value in a performance sense. Shoe-string
budgets may be detrimental not only from a core
structural strength perspective, but an investor
perception of reliability as well. As a result
of lowered start-up costs in Singapore and Hong
Kong, the same resource monies previously set
aside for legal, tax, staffing and rent are now
being channelled into buttressed risk management,
IT and real time research services.
In terms of start-up and running costs, Singapore
remains less expensive than Hong Kong cost
of professional services (accounting, audit, tax,
legal), marketing and human capital placement
remain competitively lower than Hong Kong. Legal
costs for a simple exemption application can be
obtained in the region of US$6000-8000, while
a full-blown licensing application from Hong Kong
would likely require experienced Hong Kong legal
advice from US$15,000 and upward.
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 than Singapore.
However, there is a growing trend of human capital
shifting into the island republic as well as strengthening
local branch services. HSBC's alternative funds
services, for example, has 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.
Also of interest are the new listing criteria
which came into force in July 2002 for the listing
of funds on the Singapore Exchange Securities
Trading Limited (SGX-ST). There are different
qualification requirements depending on the domicile
of the investment fund, the denomination of the
currency and other specifics. These qualifying
requirements range from specific assets under
management hurdles, investment restrictions, mandatory
disclosures and spread and holding restrictions.
While many hedge fund managers still view these
hurdles and restrictions as being too restrictive
for the traditional "black box", the
move by the SGX-ST to consider a Dublin similar
registration listing regime is indicative of its
willingness to capture hedge fund attention. The
qualifying process could also serve as a soft
barrier and evidence of core infrastructure strengths,
allowing for more favourable investor perception
in the mid-game.
Nevertheless, Hong Kong is still generally viewed
as more active by the investment community, and
while most investors doing an Asian tour will
stop by in Singapore, all will stop in the SAR.
2004 saw 19 hedge fund start-up launches in Singapore
with 13 in Hong Kong, and from that Singapore
accounted for more than 20% of the new launches
in the Asia-Pacific region in 2004, as opposed
to 13% for Hong Kong. However, Hong Kong remains
well ahead in terms of total AUM, at around US$9.3
billion to Singapore's US2.8 billion out of an
Asia-Pacific total of US$60 billion. That said
large American funds such as Tudor, Everest and
Moon Capital have settled in Singapore, hinting
at the island republic's growing popularity.
Singapore imposes tax on a semi-territorial basis.
Income is taxed based on it being sourced or deemed
as source in Singapore, and foreign-sourced income
is taxed when remitted or used for the purposes
of defraying Singapore-based expenses. In the
context of a hedge fund, the place of business
will determine the source of the income, and a
foreign hedge fund that has its discretionary
management in Singapore would be regarded as carrying
on business in Singapore. However, "legitimate"
fund managers may take advantage of statutory
provisions that allow exemptions of tax of "designated"
income of foreign funds. There are criteria for
this, such as the investors of the fund have to
be non-citizens and non-residents where an individual
beneficiary and a company's investors must not
be residents in Singapore, nor have more than
20% of their issued share capital beneficially
owned directly or indirectly by residents in Singapore.
Some qualifying managers may be able to obtain
an "Approved Fund Manager" ("AFM")
tax incentive, which allows tax to be reduced
to 10% from the normal corporate tax rate of 20%.
This incentive requires a minimum of S$100 million
under management as well as other conditions relating
to the experience of the managers.
For Hong Kong, a 17.5% profits tax is payable
by a person who carries on business in Hong Kong
or derives profits which are sourced in Hong Kong.
This includes an agent, who is a person based
in Hong Kong on behalf of another, but with general
authority to negotiate and conclude contracts.
Investment managers or advisors based in Hong
Kong generally operate within this role definition.
However, investment advisors approved under the
Securities and Futures Ordinance will generally
not be considered as an agent of a non-resident
person for this purpose if the advisor is not
an associate of the fund and acts in an independent
capacity while receiving customary rate of compensation.
Draft legislation on whether fund profits are
taxable may not have fully and clearly addressed
the matter. There are however specific exemptions
within the current tax legislation that provides
protection for collective investment schemes that
are "authorised" by the Securities and
Futures Commission ("SFC") (although
not many such funds have been authorised; only
about 10 since 2004), or collective investment
schemes that are established outside Hong Kong
where the Inland Revenue Department of Hong Kong
is satisfied that it is "bona fide widely
held" and complies with the requirements
of a supervisory authority within an acceptable
Registration in Singapore
The Securities and Futures Act (SFA) and the Financial
Advisers Act (FAA) are the two main statutes which
govern hedge funds and create a single cohesive
regulatory regime under the purview of the MAS.
Most "fund management" activities will
fall under the SFA as a regulated activity that
either requires a person conducting the activity
to a) hold a capital markets services licensed
(issued by the MAS) or b) to be exempt from the
licence under a series of qualifications. The
majority of fund managers in Singapore operate
under the exemption, which may be invoked as long
as marketing of the fund in Singapore is significantly
limited. There are no capital requirements for
fund managers operating under an exemption.
Marketing or distributing hedge funds (that fall
within the definition of "collective investment
scheme" as defined by the SFA) are activities
regulated under the FAA, and persons or entities
conducting such activities would be required to
hold a financial advisors licence or enjoy an
exemption from the licence similar to the conduct
of fund management. As hedge funds in Singapore
are largely marketed on a private placement basis,
the marketing of hedge funds by intermediaries
is not as yet a common practice, and a hedge fund
manager is able to market a fund managed by it
without the need for any form of licence, but
it cannot market other third party funds. However
the general ability to market should take into
account who one can market to, and the definitions
of accredited and qualified investors are detailed
in the acts.
The Code for Collective Investment Schemes have
a variety of stipulations, one of which determine
that investment managers or advisors of a fund
must meet qualification requirements, such as
appropriate training in the field of investment
and five years of experience each for two minimum
executives appointed to the activity.
An exemption can be obtained in a matter of weeks
following the provision of appropriate due diligence,
business plan forecasts, identities and application
to the MAS, as the exemption can be seen more
of a declaration of exemption then an application
for one. Legal advice is necessary but not substantial,
and local counsel can be found to make the necessary
applications without significant cost.
Registration in Hong Kong
There are nine different "types" of
regulated activities in Hong Kong in relation
to finance activity and range from Type 1 (Dealing
in Securities) to Type 9 (Asset Management). Generally,
a hedge fund organised in a simple structure of
an offshore domiciled fund, offshore domiciled
manager and Hong Kong domiciled investment advisor
would at a minimum be required to hold a Type
4 (Advising on Securities), possibly a Type 5
(Advising on Futures Contracts) if those investment
instruments are envisaged and a Type 9 (Asset
At least two "responsible officers"
are required for each regulated activity and must
meet relevant competence requirements which would
include local regulatory knowledge. These may
require the passing of local regulatory framework
examinations, although it is possible to obtain
exemptions from these. Each executive director
of the regulated activity has to obtain the necessary
licence and approval as a responsible officer.
Type 4 and/or 9 regulated activities conducted
by a licensed corporation require that corporation
to have a paid up capital of HK$5 million, and
a required liquid capital of the higher of either
(a) HK$3 million or (b) 5% of the aggregate adjusted
The standard processing time for the applicable
licences can be up to 15 weeks and can involve
substantial legal costs on the part of the applicant
if they hope to keep within a fixed launch period,
although shorter time frames have been reached
based on efficient provision of application information.