Singapore has emerged as a key hedge fund centre in close competition with Hong Kong. Hedge fund managers and assets under management are growing and have returned to pre-crisis levels.

The growth of hedge funds in Singapore is attributed to several factors: tax incentives for fund managers, licensing exemptions for certain fund managers and easy access to Asia’s growing pool of investors.

Other factors that play an important role include Singapore’s stable economy, its workforce, the central bank’s reasonable industry regulations, a pro-business environment and good infrastructure.

The Monetary Authority of Singapore (MAS) is responsible for regulation.

Over the past few years, Singapore has seen a strong expansion of the alternative investment industry which comprises hedge fund, private equity and real estate investment managers. Managers have found Singapore a centre from which to access regional and international opportunities for both investing and gathering of assets.

The Singapore hedge fund industry has weathered the crisis reasonably well in 2009 despite the general downward trend globally. Despite a year-on-year decline in the number of hedge fund managers from 350 to 320 at the end of 2009, the assets under management (AUM) of the Singapore hedge fund industry held steady at S$59 billion ($42 billion) in the same period.

The profiles of hedge fund managers and the strategies employed by them in Singapore remained highly varied. This diversification has helped to sustain the industry during the difficult period.

Total assets managed by the Singapore asset management industry at the end of 2009 grew by 40% to reach S$1.2 trillion ($861 billion), compared to S$864 billion ($601 billion) the previous year, according to MAS’s 2009 annual survey of the industry.

This latest AUM size exceeded the pre-crisis peak in 2007. The recovery in AUM level has brought the rolling five-year average AUM growth rate to 19% a year in 2009, up from 16% in 2008. Over 80% of total AUM was sourced from outside Singapore. Half of the assets managed by Singapore-based managers were invested in equities in 2009 compared with 43% in 2008.

Most of the top global asset management companies already have a presence in Singapore. These asset managers mainly manage equity and fixed income portfolios in the long-only space. The contribution to total AUM by the 20 largest asset management companies in Singapore remained largely unchanged from previous years, accounting for 42% of total AUM in 2009.

In the aftermath of the financial crisis, the Asia-Pacific markets benefited from greater investor interest. The region continues to be the key investment destination for Singapore-based asset managers, accounting for 61% of total AUM in 2009. The increase of nine percentage points reflected growing interest in Asia as an asset class.

In 2009 total collective investment schemes (CIS) AUM increased 35% to reach S$31 billion. Investments into most types of CIS funds registered an increase, with the allocation into equities funds experiencing the highest year-on-year growth of 72%. In terms of geographical allocation, Asia-Pacific accounted for 71% of CIS investments in 2009, compared to 67% in 2008, reflecting continued interest in the region.

CIS, defined in section 2 of the Securities and Futures Act (Cap 289) (the SFA), are regulated under Division 2, Part XIII of the SFA. The regulations say managers must hold a capital markets services (CMS) licence for fund management or be exempted from a CMS licence, or be a public company in certain cases as well as being fit and proper. Trustees must be approved by the regulator. Schemes must comply with the Code on Collective Investment Schemes (including any applicable investment guidelines). A prospectus in compliance with the SFA must be made with the authority and registered.

For schemes domiciled outside Singapore, the manager must be licensed or regulated in the jurisdiction of its principal place of business and be fit and proper.

Recognised schemes are not subject to the investment guidelines in the Code of Collective Investment Schemes. However, the authority only recognises a foreign scheme if it is subject to investment guidelines in its home jurisdiction which are substantially similar to Singapore’s rules.

The scheme needs a representative in Singapore to act as a liaison between investors and the foreign manager. The representative must be an individual, a company incorporated in Singapore or a foreign company registered in Singapore under the Companies Act.

CIS offered to the institutional investors are exempted from all authorisation and prospectus requirements under the SFA. Unlike offers to retail investors, a prospectus is not required and there is no requirement for any other document. There is no minimum subscription requirement.

MAS is reviewing the regulatory regime for financial intermediaries conducting fund management activities and the exemption regime for financial intermediaries engaged in leveraged foreign exchange trading.

A consultation paper was issued and responses returned in May 2010.

The review is aimed at ensuring regulation keeps pace with developments globally, formalising existing best practices as well as enhancing regulatory oversight over the respective industries.

The proposed enhancements are aimed at raising the quality and standard of industry players to foster long-term sustainable growth of the fund management industry.

The proposals represent an evolution of the existing regulatory regime for the fund management industry. Fund management companies (FMCs) whose activities are limited in scale and impact may continue to operate under a notification regime and be subjected to certain conditions.

This is similar to the existing framework for exempt fund managers. FMCs that serve retail investors and/or manage or advise on a larger portfolio will have to be licensed.

Under proposed business conduct requirements, FMCs will need to maintain customers’ monies and assets with independent custodians, ensuring segregation of duties between the functions of fund management and fund administration.

FMCs will also need to have compliance arrangements commensurate with the size and scale of its business. ■