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 market deployment.
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 regulatory regime.
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 Management).
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 liabilities.
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.