New Trends in Singapore's Hedge Fund Industry

The hedge funds industry in Singapore has undergone significant development and growth over the past 18 months. In particular, the number of hedge funds managed from Singapore has grown from a little over 10 to more than 49 within that period of time. What is the reason for this? Where is the industry heading?

Undeniably, a stable cost structure and a clear and conducive regulatory and tax environment has primed Singapore into one of the most desirable places in Asia for fund managers to open their own boutique hedge funds. Since 2002, an increasing number of former proprietary desk traders, institutional fund managers and private bankers have struck out on their own to start their own businesses. Growth continues at a rapid pace. According to Eurekahedge, a Singapore-based hedge fund consultancy, Singapore overtook Hong Kong in terms of hedge fund launches last year – 13 new set-ups in Singapore compared to 12 in Hong Kong. In the first half of 2004, the trend is even more striking – 12 new hedge funds opened their doors in Singapore, however only 6 launched in Hong Kong. To keep up with the growth and to service the new set-ups, Eurekahedge has now launched the first fully-equipped hedge fund hotel, located in Singapore.

Figure 1: Singapore Hedge Funds - by Assets Under Management

Source: PwC / Eurekahedge Research, August 2004

Certain trends have begun to emerge clearly amidst the recent spate of massive start-up activity. Among these is the increasing number of US-based hedge funds who have already started or are planning to start operations in Singapore. Given the market inefficiencies and the arbitrage opportunities available in Asia, these US-based hedge fund managers have come in pursuit of alpha. With Asian investors' changing preference in financial instruments, fund managers are attracted to tap on the growing local appetite for alternative investments. The market entry strategies have presented themselves in varied forms – from creating alliances with the local fund managers, to sending their representatives to launch operations from scratch, and even to identifying and acquiring successful local hedge fund managers. Whichever the approach chosen, one thing is clear – all the new players understand the importance of the local know-how and have sought to maximise their potential through acquiring contacts within local networks.

Most Singapore-managed funds are still relatively small. While the interest in hedge funds is growing among the Asian investor base, the search for investor capital has historically been primarily focused on the European capital markets. Notwithstanding, more and more hedge fund operations based in Singapore are increasingly seeking capital infusion from the US. There are two major approaches to tapping the US capital markets: (1) funds which have only one or two tax-paying US investors would typically opt for the less expensive Passive Foreign Investment Company (PFIC) status, while (2) those with many US investors usually go for a full-blown onshore US feeder. Although the second solution is significantly more expensive given the US set-up costs, it is still seen as more beneficial to the US investors when tax reporting is taken into consideration.

An increasing number of Singapore-managed hedge funds are also starting to consider seeking further recognition by applying for a listing on stock exchanges, most notably on the Irish Stock Exchange. Listing on an exchange allows the funds to use the status as a marketing tool to potential investors; the market's view is that it adds visibility to the fund and gives the investors more comfort from the perception that the fund is under some regulatory oversight.

Although the equity long/short managers still make up the largest percentage (in terms of numbers) of funds in Singapore, other fund strategies are also expanding at an aggressive pace. Strategies such as managed futures/contracts for differences and global macro are making their way into Singapore. In addition, the new equity long/short funds tend to be more specialised than before. For example, single country focus such as those zooming in specifically on Korea or Japan are becoming more common. From the vast array of strategies that are surfacing (Figure 2), we see that finding an investor niche is fast becoming an important differentiating factor to cater to diverse investor preferences.

Figure 2: Singapore Hedge Funds - by Strategy

Source: PwC / Eurekahedge Research, August 2004

One interesting fact which has emerged (Figure 3) is the fact that there was no clear leading strategy adopted by the largest Singapore-managed hedge funds (over $100 million in assets under management). There appears to be as many successful global macro funds as there are equity long/short funds.

Figure 3: Strategies of Funds with Asset Under Management of more than $100 million
Strategy Number of funds Percentage
Macro 3 37.5%
L/S Equity 3 37.5%
Multi-strategy 1 12.5%
CTA 1 12.5%
Total 8 100%
Source: PwC / Eurekahedge Research, August 2004    

While Singapore-managed hedge funds still have some way to catch up with the operational expertise and infrastructure of their American or British counterparts, the local alternative investment arena is quickly becoming more and more sophisticated. To beef up confidence in these complicated instruments, a number of hedge funds established advisory panels to provide an independent perspective to the investment proceedings, as well as advocated fully independent directors sitting on the boards of the funds. This is seen to be a marketing advantage in providing investors with added comfort in the way these funds are managed. As the funds begin to grow, we also see a number of hedge fund managers starting to appoint chief operating officers to their organisations.

All in all, the forecast for the growth and deepening of the Singapore hedge funds industry is positive. Albeit the continued support and commitment by the regulatory authorities to encourage local talent to develop and start hedge funds continues to be an important factor, much of the future growth will nevertheless depend on the willingness of statutory bodies and institutions to allocate funds into the alternative investments space. Many players in the industry are also hoping for more incentives which will allow hedge funds to be brought 'onshore' in the bid to encourage wealth management and development in the Singapore capital markets. Encouraging prime brokers to re-locate to Singapore is also an important factor in the development of Singapore as a major hedge funds player.