Faith Morrow
Singapore has become a popular location for hedge fund managers to practice their professions in Asia, and manage other hedge funds both locally and internationally. The country has become one of the financial capitals of Asia, attracting more hedge funds, both foreign and start-up, to meet the increasing demands for capital. Singapore's stable political and economic climate, business-friendly environment, and favourable regulatory framework make it an attractive destination for hedge funds.
The Singapore government has instituted a forward-looking regulatory approach towards the sector to attract global fund managers. The Monetary Authority of Singapore (MAS) has set a minimum standard of qualifications required for fund managers, and the country offers a streamlined regulatory framework and tax benefits for hedge funds.
This article will provide an overview of the requirements, regulations, and steps involved in starting a hedge fund in Singapore.
| Characteristics | Values |
|---|---|
| Definition | A hedge fund is a sort of investment partnership or pooled investment structure that is set up by a money manager or registered investment advisor. |
| Investor type | Only open to accredited or qualified investors |
| Investment options | Wider investment latitude – Hedge funds could invest in anything, including land, real estate, stocks, derivatives, currencies, and non-mainstream asset classes. |
| Strategies | Often employ leverage, short-selling, arbitrage, and derivatives. |
| Fee structure | The fee structure of hedge funds charges both an expense ratio and a performance fee, which is commonly “Two and Twenty”—2% for asset management fee and 20% cut of any generated gains. |
| Fund type | There are two types of funds: Domestic (Onshore) and Foreign (Offshore). |
| Licensing requirements | Fund managers operating with not more than 30 qualified investors are exempted from licensing. |
| Investor requirements | For investors to qualify with hedge fund investment, they need to be an accredited investor, meaning they must meet the net asset exceeding S$2 million (with S$1 million counting only for property assets) or have evidence of having earned S$300,000 or more in the past 12 months. |
What You'll Learn
Singapore's popularity for hedge funds
Singapore has become a hub for hedge funds in Asia due to its stable political and economic climate, business-friendly environment, and favourable regulatory framework. The country's status as an international financial centre, coupled with its forward-looking regulatory approach, has attracted global fund managers. Additionally, the influx of wealth and the presence of established financial institutions in Singapore make it a strategic location for hedge funds.
The Monetary Authority of Singapore (MAS) has played a crucial role in fostering a conducive environment for the hedge fund industry. The MAS has instituted a regulatory approach that strikes a balance between investor protection and attracting fund managers. This includes clear guidelines, licensing requirements, and tax incentives.
Singapore's hedge fund industry also benefits from the country's robust financial infrastructure and the availability of specialised service providers. These service providers include accounting, auditing, legal, and administrative professionals who facilitate the operational aspects of fund management.
Furthermore, Singapore's position as a financial hub in Asia provides hedge funds with access to the region's growing markets and investment opportunities. The country's proximity to other Asian markets, particularly those in the Asia-Pacific region, makes it an ideal base for hedge funds looking to capitalise on the increasing flow of global capital towards the region.
In summary, Singapore's popularity for hedge funds can be attributed to its stable business environment, favourable regulations, robust financial infrastructure, and strategic location. These factors have collectively contributed to making Singapore a preferred destination for hedge funds seeking to establish a presence in Asia.
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Requirements for investors
Hedge funds are only open to accredited or qualified investors. To qualify as an accredited investor, you must meet certain net worth requirements. Specifically, you must have a net worth exceeding S$2 million (excluding property value) or have earned S$300,000 or more in the past 12 months.
These requirements are in place because hedge funds deal with large sums of money and involve a high level of risk. If a hedge fund fails, it could be difficult for the average person to recover their losses. Additionally, fund managers would have to spend a significant amount of time and effort keeping less sophisticated investors informed about the investing strategies and mechanics of the fund.
By limiting hedge funds to accredited and institutional investors, fund managers can assume a higher level of financial knowledge and sophistication among their clients. This allows them to operate with a greater degree of autonomy and focus on implementing their investment strategies.
It is important to note that the requirements for accredited investor status may vary depending on the specific hedge fund and the regulations in Singapore. It is always advisable to carefully review the eligibility criteria and consult with a financial professional before making any investment decisions.
In addition to the net worth requirements, investors should also be aware of the fees associated with hedge funds. Hedge funds typically charge both an expense ratio and a performance fee. A common fee structure is the "Two and Twenty" model, where investors pay a 2% management fee on the total asset value and a 20% performance fee on any profits earned.
Before investing in a hedge fund, it is crucial to carefully review the fund's offering documents, including the prospectus and financial reports. These documents will provide detailed information about the fund's investment strategies, risks, fees, and historical performance.
By understanding the requirements and fees associated with hedge funds, investors can make more informed decisions and assess whether this type of investment aligns with their financial goals and risk tolerance.
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Hedge fund classifications
Hedge funds are typically classified as either domestic (onshore) or foreign (offshore). However, there are several other ways to categorise hedge funds, including by their investment strategy, structure, and investor type.
Onshore vs Offshore
Onshore funds are domiciled in Singapore and governed by the Hedge Fund Guidelines set out in the Code on Collective Investment Schemes (the "Code") issued by the Monetary Authority of Singapore (MAS). These funds can be offered to both domestic and foreign investors but are usually marketed only to domestic investors.
On the other hand, offshore funds are established in jurisdictions outside of Singapore. They can be marketed to domestic investors under certain conditions.
By Investment Strategy
Hedge funds can also be classified by their investment strategy. Some common strategies include:
- Equity hedge: maintaining long and short positions in equity and equity derivative securities.
- Event-driven: investing in companies involved in corporate transactions such as mergers, restructurings, or financial distress.
- Macro: trading based on movements in underlying economic variables and their impact on various markets.
- Relative value: investing based on the realisation of a valuation discrepancy between multiple securities.
By Structure
Hedge funds may also be structured as either limited partnerships or limited liability companies. Limited partnerships are typically set up between fund managers and investors, with the former taking control of operations and the latter investing in the fund.
By Investor Type
Hedge funds are usually only open to accredited or qualified investors who meet certain net worth requirements. In Singapore, this means having a net worth of at least S$2 million or evidence of having earned S$300,000 or more in the past 12 months.
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Licensing requirements
To start a hedge fund in Singapore, you must meet the licensing requirements. The Monetary Authority of Singapore (MAS) regulates the registration, licensing, and business conduct of fund management companies.
Fund managers operating with not more than 30 qualified investors are exempted from licensing. A "qualified investor" is a fund (e.g. the hedge fund) that is offered in Singapore only to accredited investors. An accredited investor is an individual with net assets exceeding S$2 million (with S$1 million attributable to non-property assets) or a corporation with net assets exceeding S$10 million.
Fund managers who plan to market a fund to retail investors must obtain a Capital Markets Services (CMS) License from the MAS under the Securities and Futures Act (Chapter 289) (SFA). This license has a minimum capital requirement. Hedge funds offered to retail investors and constituted in Singapore are called Authorized unit trusts.
Offshore Fund Managers promoting to Singapore investors must be licensed or regulated in the jurisdiction of their principal place of business and be fit and proper. These funds are called Recognized unit trusts.
The investment adviser promoting a fund would need a Financial Adviser's license (FA Licence). An exemption is available if a person resident in Singapore acts as a financial adviser to not more than 30 accredited investors.
The following activities are regulated by the SFA and require a CMS License from MAS:
- Dealing in securities
- Trading in futures contracts
- Leveraged foreign exchange trading
- Advising on corporate finance
- Real estate investment trust management
- Securities financing
- Providing custodial services for securities
Regulatory Compliance
The MAS has set a minimum standard of qualifications for fund managers, including completing the A-Level (or equivalent), having a finance or accounting degree, and passing the CMFAS, along with any other relevant requirements.
Tax Exemptions
A Singapore-based fund manager will be exempt from tax on specified income from designated investments if the fund is a qualifying fund. A qualifying fund should not be a Singapore resident and cannot be 100% owned by Singapore investors.
Fund Structure
Hedge funds can use the VCC (Variable Capital Company) structure to tailor their fund to investors' needs and objectives while enjoying streamlined regulations and tax benefits. Under the VCC, they can create an unlimited number of sub-funds with different strategies and audiences. The VCC also guarantees privacy as investor information is not made public.
Singapore has a favourable regulatory framework for hedge funds, and its stable political and economic climate, business-friendly environment, and strategic positioning in Asia make it a popular destination for fund managers.
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Regulations for fund managers
Singapore has a forward-looking regulatory approach to attract global fund managers. The Monetary Authority of Singapore (MAS) has set out the following regulations for fund managers:
Licensing Requirements
Fund managers operating with 30 or fewer qualified investors are exempt from licensing. A "qualified investor" is either an individual with net assets exceeding S$2 million or a corporation with net assets exceeding S$10 million. Fund managers who plan to market a fund to retail investors must obtain a Capital Markets Services (CMS) License from MAS under the Securities and Futures Act (SFA).
Regulations of Marketing to Retail Investors
The promotion of hedge funds to retail investors is allowed if it is an authorized or recognised fund. The minimum subscription requirements for Onshore and Offshore funds offered to retail investors are S$100,000 for single hedge funds and S$20,000 for hedge fund-of-funds (FOHF). There are no minimum subscription requirements for funds marketed to institutional investors.
Regulation of Managers
The manager of a single hedge fund should have expertise in managing such schemes. Where investment decisions are outsourced, the sub-manager or adviser should have the necessary expertise. The manager should have at least two executives with at least five years of experience in hedge fund management. In the case of FOHF, at least three years of experience should be in FOHF management.
Regulation of Investment
A Singapore single hedge fund may invest in another single hedge fund, provided it is not a feeder fund. A Singapore FOHF may invest in another FOHF, which should only invest directly in other hedge funds and not through a feeder fund. An FOHF should be diversified across at least 15 hedge fund managers or allocate no more than 8% to a single hedge fund manager.
Regulation of Liability of Investors
The liability of investors must be limited to their investment. The constitutive documents of the hedge fund should contain a provision limiting the liability of investors to their investment in the scheme.
Regulation of Reporting
The manager should prepare and furnish to the trustee the annual audited accounts and reports, semi-annual accounts and reports, and quarterly reports for each of the four quarters of each financial year. The trustee must audit and send the reports to the participants. The reports should disclose the portfolio statement and top 10 holdings, but this requirement is waived if such disclosure is prejudicial to the interests of the scheme.
Regulation of Leverage
A single hedge fund may be leveraged up to the extent disclosed in the prospectus. An FOHF may borrow only for the purposes of meeting redemptions and short-term bridging requirements (not more than 3 months) and should not exceed 25% of the deposited property of the FOHF.
Regulations of Marketing to Accredited Investors
Restricted authorised (Onshore) and restricted recognised (Offshore) hedge funds can only be offered to accredited investors. Onshore hedge funds offered to accredited investors can only be offered to certain types of investors as defined under Section 305 of the SFA. These investors require a minimum total net asset size or annual income exceeding a certain amount (as set out in Section 4(A) of the SFA) or a minimum of SGD 200,000 per transaction. The same applies to Offshore recognised schemes. Unlike funds offered to retail investors, there is no requirement for any prospectus or other offering document.
Regulations of Marketing to Institutional Investors
For both Onshore and Offshore funds marketed to institutional investors, there are no minimum subscription requirements. As defined in Section 4A of the SFA, they are exempted from all authorisation and prospectus requirements under the SFA.
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Frequently asked questions
A hedge fund is a sort of investment partnership or pooled investment structure that is set up by a money manager or registered investment advisor. It is not a type of investment.
There are four key characteristics that define a hedge fund:
- Only open to accredited or qualified investors – Investors need to have certain net worth requirements.
- Wider investment latitude – Hedge funds can invest in anything, including land, real estate, stocks, derivatives, and currencies.
- Often employ leverage – Hedge funds use borrowed money to increase returns.
- Fee structure – Hedge funds charge both an expense ratio and a performance fee, which is commonly “Two and Twenty”—2% for asset management fee and 20% cut of any generated gains.
Singapore has become a popular destination for hedge funds due to its stable political and economic climate, business-friendly environment, and favourable regulatory framework. To set up a hedge fund in Singapore, you will need to follow these steps:
- Engage a fund manager as the central coordinator for your fund.
- Confirm the fund structure’s term sheet, including the investment period, fund life, management fee, valuation frequency, investment targets, and fund size.
- Select a legal counsel, fund administrator, corporate secretary, and auditor.
- Draft legal documents such as a company constitution, private placement memorandum, management, subscription, and redemption agreements.
- Register and incorporate the fund with the Monetary Authority of Singapore (MAS).
- Apply for tax exemption.
- Start onboarding investors.
- Create additional sub-funds for different investors and strategies.
The MAS has set out licensing requirements, regulations, and incentives for hedge funds in Singapore. Here are some key requirements and regulations:
- Licensing Requirements: Fund managers operating with no more than 30 qualified investors are exempt from licensing. A "qualified investor" includes a fund offered in Singapore only to accredited investors with a certain net worth. Fund managers planning to market to retail investors must obtain a Capital Markets Services (CMS) License from the MAS and meet minimum capital requirements.
- Investor Requirements: To qualify for hedge fund investment, an individual investor must have a net worth exceeding S$2 million (excluding property value) or have earned S$300,000 or more in the past 12 months.
- Fund Manager Qualifications: Fund managers are expected to have the knowledge and expertise in asset management and complete relevant qualifications, such as the A-Level (or equivalent) and a finance or accounting degree.
- Reporting Regulations: Hedge fund managers must prepare and provide trustees with annual audited reports, semi-annual reports, and quarterly reports, disclosing the top ten holdings, portfolio statement, and performance fees.
