Hedge-Fund Startups Adapt to New Singapore Rules: Southeast Asia
When Gaurav Bansal’s lawyers told him about Singapore’s tightened hedge-fund rules introduced in August 2012, he faced the prospect of spiraling costs to meet the demands for starting his own fund.
The solution was to sign up with Swiss-Asia Financial Services Pte, which provides infrastructure, office space and services to meet compliance requirements and is licensed by the Monetary Authority of Singapore.
“The regulatory change threw a spanner in the works,” said Bansal, 40, who started his Salmon Global Fund with $4 million of assets in March under the Swiss-Asia Financial umbrella. “They really came to my rescue.”
Bansal is among managers of smaller startup funds in Singapore, Asia’s biggest hedge-fund hub after Hong Kong, who are turning to such platforms to reduce costs. Swiss-Asia Financial signed up 20 managers seeking to start their own funds in the past nine months, while the number of new funds set up more than doubled to seven last year at Gordian Capital Singapore Pte, according to the companies.
“If you have less than $40 million in assets under management and you are launching a fund aimed at global investors, it has become much more difficult,” said Mark Voumard, chief executive officer of Gordian Capital. A platform “that allows managers to focus on their skill set is both a cost-effective and efficient option.”
Asia-based hedge funds oversaw a combined $79.7 billion as of March, having recovered by 41 percent from the April 2009 trough, according to Eurekahedge Pte. In Singapore, 288 fund-management companies had $15.3 billion of assets under management as of March, compared with $25.2 billion managed by 447 firms in Hong Kong, the Singapore-based data provider said.
“The investor network that platforms can offer should also be viewed as a key driver to joining a platform,” said Omar Taheri, business development manager at Swiss-Asia Financial. “After all, raising capital is still one of the most difficult tasks when you start a hedge fund.”
The tighter regulations introduced by the MAS in 2012 mainly affected smaller entities that were previously known as exempt fund managers.
Under the previous rules, companies seeking to start under the exempt status were “encouraged” to have at least two professionals with a minimum of five years of experience, according to Singapore-based law firm Colin Ng & Partners LLP. They weren’t subject to audit requirements, business conduct rules or restrictions on assets under management. The only relevant rules were that they weren’t allowed to have more than 30 qualified investors as clients.
Under the tightened regulations, registered fund management companies must have at least two relevant professionals with a certain level of experience. In addition, they aren’t allowed to manage more than S$250 million ($200 million) or have more than 30 qualified investors as clients, as opposed to licensed funds managers, who have no such restrictions.
Registered managers also have to meet certain capital requirements, need to implement a compliance and risk management framework and are subject to tighter reporting, accounting and auditing requirements, according to the regulator.
The city-state had about 540 exempt fund managers under the old rules, an estimate by PricewaterhouseCoopers LLP showed. About 200 of the exempt-status managers chose to become registered, while about 190 of them obtained a fund-manager license with higher requirements and unlimited assets under management, it said.
About 90 fund managers who were exempt shut down, joined other companies such as family offices or signed up with a platform, while the remaining 60 have either applied for a license or to become a registered fund manager, according to the consulting firm.
“For 80 percent of the exempt fund managers the change in regulation made no difference,” said Peter Douglas, principal of Singapore-based research firm GFIA Pte. “For 20 percent it was terminal.”
Not all newer fund managers are linking up with partners providing non-investment services. Integral Capital Pte started a long-only fund in 2011 under the old regime and chose to become a registered fund manager when the new rules were introduced, even with the higher costs, said Talib Dohadwala, a founding partner at the Singapore-based company. The stricter regulations mandate an audited financial statement as well as a risk management audit, both done by an external firm that could cost more than S$15,000, according to Dohadwala.
“We wanted to be independent and run our business autonomously,” said Dohadwala. “We felt from the beginning that we could meet the requirements under the new regime.”
“I don’t think those regulations are overkill,” Jamieson said. “Singapore, being a proper financial market, needs proper regulation.”
Bansal found a cost-effective solution by joining Swiss-Asia Financial.
“If you do it exactly by the book and set up a registered office with the amount of space that is required as for the regulations and employees it would easily cost between S$250,000 and S$300,000 per year,” Bansal said. “By setting up business with the platform I save more than half of that amount.”
Five out of 20 that have signed up with Swiss-Asia Financial are either already in business or about to start, Chief Operating Officer Steve Knabl said in Singapore. That compares with one fund a year starting in previous years, he said, adding that the company has seen a “dramatic increase of interest.”
“The challenge we are having is some fund managers are not willing to pay our platform fees,” said Taheri, adding that managers should realize they can save money going with a platform rather than setting up on their own.
Roshan Padamadan also started the Luminance Global Fund, which invests in liquid securities including stocks, bonds and derivatives, in January with Swiss-Asia Financial. He chose to start through the company because it allows him to focus on his investments.
“If you run your own hedge fund, you have to devote about half of your time and energy to administration and organization,” said Padamadan, who started with initial capital of about $1 million and now manages $1.55 million. “Working on a platform, you can spend much more time on the actual investment process. I prefer to keep my head clear for that.”
Anil Ponnampalam, manager of the Archimedean Point Fund, said that investing under a licensed company helps dispel investors’ concerns that a new fund’s operations may not be robust. Ponnampalam started his Asia-focused long-short equity fund with Gordian Capital this month, he said.
“It’s about mitigating the business and operational risks to allow me to focus on the performance as an investment manager,” Ponnampalam said. “I owe that to every investor in my fund.”
Gordian Capital, which typically attracted three new funds on average annually, saw the number grow to seven new funds in 2013, Voumard said. Two have already started this year and two more will begin soon, he said. Inquiries have also doubled to about 100 managers seeking to start in the past 12 months, he said.
“If you either have a small asset size or no interest in building an organization, then some kind of a platform deal is very sensible,” Douglas said.
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