Singapore: AsiaƆs hedge fund hub?

MAS''s Ng Nam Sin, executive director financial centre development department, discusses the growth of hedge funds in Singapore.

What role do hedge funds play in your vision to develop Singapore as a regional financial hub?

Ng: We've always taken the position that we welcome hedge fund or alternative players to come to Singapore. However, in terms of promoting or regulating them, we don't differentiate hedge funds from the rest of the asset management industry.

Rather, we see them as part and parcel of it. We want to see a diverse fund management industry develop in Singapore. Hedge funds are important for this diversity as they pursue alternative strategies. They use sophisticated products and are usually not benchmark based.

How large is Singapore's hedge fund industry?

The feel we're getting from the hedge fund industry in Singapore is that they are managing about $2-2.5 billion in assets. If you compare this to the total size of our asset management industry it only makes up a small part. In 2002 Singapore had $200 billion in assets under management.

How about in terms of number of funds?

Over the last two or three years we've seen a significant growth in the number of hedge funds setting up in Singapore. Last year a total of 13 hedge funds set up in Singapore. This year is on track to surpass that as nine hedge funds have already set up here during the first three months of this year.

We're quite bullish about the future growth. We've seen enquiries from fund of hedge funds and incubator funds looking to be based in Singapore as well.

Why is Singapore an attractive location for a hedge fund managers looking to set up in Asia?

Firstly, we have a very established fund management industry and people are familiar with our operating environment. Our regulatory framework is very transparent. It is easy for new hedge fund players to set up. You can effectively start business immediately if you restrict business to less than thirty qualified clients (high net worth or sophisticated corporate). All you need to do is notify MAS within 14 days of commencing activities. It only takes about six to eight weeks to get a capital markets service license.

Secondly, our tax framework is very clear. In order for the fund to be eligible for tax exemption at least 80% of the fund must be from offshore investors.

In its recent consultation paper for exempting offshore funds from tax, the Hong Kong government was heavily criticised for placing too much burden on fund managers to trace and report the residency of their investors. How does Singapore compare?

I believe in our case the way in which the fund manger clarifies whether a fund is on or offshore is less onerous then what Hong Kong has recently presented. How we deem the 20% to be local is based on tax residency and whether these investors have a permanent establishment in Singapore. It is quite clear cut and straightforward for fund managers to find out.

Do funds have to regularly update you on the residency of their investors?

No. The onus is on the fund managers to monitor this themselves.

The Hong Kong government has been concerned that offshore tax exemptions may be subject to round tripping. How does Singapore handle this issue?

Of course we are concerned about round tripping and this is an offence in Singapore. But we are still a lot smaller compared to Hong Kong. A lot of the onus is placed on the hedge fund managers to comply. We haven't gone out on an aggressive spree to inspect the hedge funds.

Round tripping is an issue for many other industries, not just hedge funds, so the Inland Revenue have established ways of spotting these offences.

If Hong Kong granted blanket exemptions to offshore funds would this make Hong Kong a more competitive location and would Singapore seek to follow suit?

Our incentive is really quite generous at the moment. It is almost a blanket exemption. So I think we'd still be on par with Hong Kong if they granted a blanket exemption.

Does Singapore offer any other incentives, besides tax incentives, to hedge funds? Do you offer wage or rent subsidies?

No, we do not offer any other subsidies in addition to tax incentives. As for wage and rent costs, Singapore is already very competitive on these fronts

Do you assist hedge funds with capital introduction to Singaporean hedge fund investors such as GIC and Temasek?

From what we hear the allocations to Asia are coming from US and European investors. The market tells us that there is about US$1 billion being allocated to Asia every month. Institutions in Asia are beginning to realise the benefits of alternative investments and are starting to invest in a conservative way. We do facilitate capital introduction to the extent that we help hedge fund managers understand the market in Singapore. On the other side, we also try to educate the market in Singapore about what a hedge fund is.

As for GIC and Temasek, most hedge funds in Singapore would already know these institutions quite well.

Do the hedge fund managers setting up in Singapore tend to have a Singaporean background or connection?

It's quite a good mix. Some are Singaporeans who have left their previous jobs in financial institutions. But there are a lot of non-Singaporeans who have worked in Singapore and developed contacts and decide to set up here. We've also seen a lot of foreign players set up Asian offices in Singapore, most recently Everest Capital, and even earlier, Oak Tree, which has had a relatively large research operation in Singapore for the last five to six years.

We have even seen hedge funds set up in Singapore to manage investments into Korea and India.

Are most of Singapore's hedge funds new businesses or are you seeing established funds move to Singapore from elsewhere in the region?

Most of it is new business. But there are some hedge funds that move from elsewhere. We have an example of an Australian fund that moved to Singapore because they felt it was a better location for their strategy, which had an Asian focus, and also for soliciting clients.

How do you view Hong Kong as a competitor for the region's hedge fund business?

Hong Kong has a head start and there are more players there. The pie is big enough for both of us. There is a lot of business coming to the region. People will choose a Hong Kong or Singapore location to suit their strategy. I think we can survive side by side.

With the number of hedge funds in Singapore growing do you expect to see more hedge fund service providers set up bases in Singapore too?

We've been getting some enquiries from service providers looking to expand their presence in Singapore. I think we do need to see more prime brokers in Singapore.

Do you offer incentives for prime brokers to move to Singapore?

We have traditional tax incentives for trading in capital markets that would apply for prime brokers too.

Do you actively meet with hedge funds and their service providers to explain the benefits of setting up in Singapore?

Yes we are quite proactive. We go out to the players and explain what Singapore has to offer and how we can help them. That is our job.