Global capital is headed towards Asia-Pacific, which is outperforming the rest of the world in economic growth. The hedge-funds also follow the capital and expert predictions have almost become a reality, there is a shift in gravity towards Asia for the industry. Asia is considered both as a significant source of funds owing to the phenomenal increase in the proportion of high net worth individuals and also as source of sustainable returns. Singapore as an international financial center offers one of the most hospitable regimes in Asia for the hedge-fund industry.
The government, through Monetary Authority of Singapore (MAS), the central bank and regulatory authority for the industry, has instituted a forward looking regulatory approach towards the industry to attract global fund managers to Singapore. As a result, the industry has gathered critical mass. MAS has rolled out several incentives in terms of reduced taxes and relaxed regulations and not only big funds are shifting their bases here but startups and smaller fund managers find Singapore’s regulatory regime welcoming. This page is an overview of the industry, providing an outline of the licensing requirements, regulations, taxation and incentives.
What Is A Hedge Fund?
The Singapore Code on Collective Investment Schemes (issued under the Securities and Futures Act 2001 and administered by the Monetary Authority of Singapore (MAS)) defines hedge funds in the following way:
There are different characteristics and investment strategies that define hedge funds. In general, a hedge fund seeks to deliver an “absolute” return independent of the directional move of equity, fixed income or cash markets. In considering whether a fund falls within these guidelines, MAS (Monetary Authority of Singapore) would consider, but not restricted to the following factors:
- Strategies that use leverage, short-selling, arbitrage, derivatives and
- Investment in non-mainstream asset classes (investments other than listed equities, bonds and cash)
Hedge Fund Structures
Based on the domicile, hedge funds are classified as:
- Domestic (Onshore) funds
- Foreign (Offshore) funds
Domestic or Onshore funds are Singapore domiciled funds, therefore are governed by the Hedge Fund Guidelines set out in the Code on Collective Investment Scheme (the “Code”) issued by the Monetary Authority of Singapore (MAS). Trust and Company are typical structures used by Onshore Funds but from 2009 Limited Partnership is also an available fund vehicle.
Foreign or Offshore funds are funds established in jurisdictions other than Singapore.
Domestic funds can be offered to both domestic and foreign investors but conventionally it is marketed to the domestic investors only. Subject to certain conditions Offshore Funds can be marketed to domestic investors.
Distribution of hedge funds to retail investors is generally through distributor banks and licensed financial advisors. Distribution of non retail hedge funds is through private banks and other exempt institutions
Fund managers operating with not more than 30 qualified investors are exempted from licensing. A “qualified investor” includes a fund (e.g. the hedge fund) which is (i) offered in Singapore only to accredited investors, meaning an individual with net assets exceeding S$2 million or a corporation with net assets exceeding S$10 million, or (ii) if offered elsewhere, such offer or invitation is made only to accredited investors, or investors in an equivalent class under the laws of the country or territory in which the offer is made. Therefore a qualifying hedge fund would count as “one” qualified investor. This is an option adopted by hedge fund managers/sub-managers in Singapore
The fund managers planning to market a fund to retail investors will have to obtain a Capital Markets Services (CMS) License from the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (Chapter 289) (SFA). A minimum capital requirement must be met to qualify for the CMS License. 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 its principal place of business and be fit and proper. Offshore hedge funds offered to retail investors in Singapore are called Recognized unit trusts.
The investment adviser promoting a fund would need a Financial Adviser’s license (“FA Licence”). An exemption is available on the basis that a person resident in Singapore who acts as a financial adviser to not more than 30 accredited investors is exempt from licensing. This option is only viable if the Offshore fund manager qualifies as an accredited investor.
The following activities are regulated by Securities and Futures Act (SFA) and require a Capital Markets Services (CMS) License from the Monetary Authority of Singapore (MAS)
- Dealing in securities
- Trading in futures contracts
- Leveraged foreign exchange trading
- Advising on corporate finance
- Fund management
- Real estate investment trust management
- Securities financing
- Providing custodial services for securities
The following activities are regulated by Financial Advisers Act (FAA) and require a Financial Adviser’s license (“FA License”)
- Marketing of unit trusts
- Offering of life insurance products
- Advisory services on investment products including life insurance policies, foreign exchange contracts, etc.
- Issuance of investment reports
Unless specifically exempted and funds with less than 30 qualified investors all other schemes and persons engaged in any of the above stated activities must obtain the appropriate license.
Overview of Regulations
Regulations of Marketing to Retail Investors
Promotion of hedge funds to retail investors is allowed if it is either an authorized or recognized funds.
The minimum subscription requirements are the same for Onshore and Offshore funds offered to retail investors and they are
- Single hedge funds: S$100,000
- Hedge fund-of-funds (FOHF): S$20,000
- Capital protected/guaranteed hedge funds: No minimum
A prospectus in compliance with the SFA must be lodged and registered in the case of funds offered to retail investors. In the case of authorized Offshore Funds the foreign prospectus can be used if it contains all the information required under the SFA.
Ample measures are in place to protect the interest of retail investors, and there is substantial emphasize on disclosure of risks and uncertainties of the returns. Therefore the prospectus must state the material differences between the hedge fund and other types of collective investment schemes and must state that only relatively little information on how the hedge fund and underlying hedge funds are managed will be available, that there is limited liquidity and that most of the underlying hedge funds are subject to minimal regulation etc. Similarly marketing materials must highlight the risks involved and reveal information such as the fees and charges payable. Appendix 4 of the Code on Collective Investment Schemes contains a list of common examples (not exhaustive) of such disclosures.
In the case of Offshore funds that are recognized for retail subscription there must be a representative for the scheme 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. The Offshore Fund manager (together with its related companies) must manage at least S$500 million of discretionary funds in Singapore.
Recognized Offshore funds, for retail subscription are not subject to the investment guidelines set out in the Code of Collective Investment Schemes however are approved on the basis of sufficient regulatory oversight in the home jurisdiction. The MAS has the discretion to determine if a foreign jurisdiction’s regulatory framework is acceptable and would at the least require that the applicable regulatory framework is similar to that of Singapore.
In the interest of the retail investors the Onshore Funds authorized for retail subscriptions are subject to the following regulations:
Regulation of Managers
The manager of a single hedge fund should have expertise in managing such schemes. Where investment decisions are outsourced to a sub-manager or adviser, the sub-manager or adviser should have expertise in managing such schemes. The professional experience, qualifications, assets under management and performance history of the manager or its sub-manager or adviser will be taken into account for assessing the expertise. The manager should have at least 2 executives who each have at least 5 years of experience in the management of hedge funds. In the case of FOHF, out of the 5 years at least 3 years must be in the management of FOHFs.
Regulation of Investment
A Singapore single hedge fund may invest in another single hedge fund which 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 another FOHF or a feeder fund.
In the case of Fund of Hedge Funds (FOHF) it should have diversification as one of its key objectives. The manager should have in place strategies to achieve adequate diversification and ensure that the fund is in line with the diversification strategy at all times. An FOHF should be diversified across at least 15 hedge fund managers or have not more than 8% allocated to a single hedge fund manager.
Regulation of Liability of Investors
The liability of investors must be limited to their investment. For this purpose, 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 or cause to be sent the reports to the participants as stipulated in appendix 4a of the Code on Collective Investment Schemes. 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. Alternatively, the aggregate exposure for the scheme categorized according to country, industry, asset class and/or credit rating of debt securities should be disclosed. The performance fees paid or payable by the scheme for the period under review should be disclosed.
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 (not more than 3 months) bridging requirements. Aggregate borrowings for such purposes should not exceed 25% of the deposited property of the FOHF at the time the borrowing.
Regulations of Marketing to Accredited Investors
Restricted authorized (Onshore) hedge funds and restricted recognized (Offshore)hedge funds can be offered only to accredited investors. Onshore hedge funds offered to accredited investors (and other relevant persons) 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 at a minimum of SGD 200,000 per transaction. The same applies to Offshore recognized schemes.
But unlike funds offered to retail investors, the restricted Offshore and Onshore Funds offered only to the accredited investors are not required to comply with any investment guidelines. Unlike offers 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 for all funds (including hedge funds). As defined in section 4A of the SFA are exempted from all authorization and prospectus requirements under the SFA.
An Onshore fund will generally be liable to Singapore income tax if it derives income sourced or deemed to be sourced in Singapore or receives foreign-sourced income in Singapore. A domestic fund is generally required to file an annual tax return with the Singapore tax authorities. Onshore funds which are established as Singapore-resident companies can generally avail of Singapore’s double tax agreements provided these funds can fulfill the relevant substance requirements.
Tax exemptions are available under the Singapore Income Tax Act (SITA) for foreign-sourced dividend, foreign branch profits, and foreign-sourced service income received or deemed received in Singapore, subject to conditions. Gains or profits which are capital in nature are not subject to Singapore income tax.
A foreign or Offshore fund distributed in Singapore which are not managed/ advised by a Singapore resident fund manager/ investment adviser are generally not subject to tax in Singapore and are not required to file an annual tax return to the Singapore tax authorities. However Offshore Funds are deemed to have permanent establishment in Singapore by virtue of their Singapore based fund managers, therefore are deemed to generate earnings from Singapore therefore are invariably subjected to tax. In this case, the foreign fund may be required to file a tax return with the Singapore tax authorities. In cases where no income is subject to Singapore tax, there could be reporting requirements for a foreign fund.
Exemption for Offshore Funds
A person in Singapore who manages a fund on a discretionary basis (whether Offshore or Onshore) will create a taxable presence for the fund in Singapore. However there are some exemptions available.
An Offshore fund managed by a Singapore-based fund manager will be exempt from tax on specified income from designated investments if the fund is a qualifying fund. For a fund to be a qualifying fund, in general, it
- should not be resident in Singapore and
- cannot be 100% owned by Singapore investors. Designated investments include investment like stocks, shares, securities, etc. It must be noted, immovable property in Singapore is excluded from the list.
But for an investor to derive tax exemption on incomes from qualifying funds, the investor must be
- An individual investor
- A foreign corporate body without presence or other forms of business activity in Singapore. In the case of foreign company, with permanent establishment in Singapore, it must not use Singapore generated funds to invest in qualifying funds
- specific Singapore government entities
- A Singapore resident corporate investor that owns not more than 30% (or 50% if the fund has 10 or more investors) of the qualifying fund.
Exemption for Onshore Funds
The above stated exemptions for offshore funds are also made available to Singapore funds with the introduction of Singapore Resident Fund Scheme, to encourage fund managers to base their fund vehicles in Singapore, by giving the same tax exemptions. To avail the exemptions a Singapore constituted fund must meet the following conditions:
- It must be approved by MAS
- The fund vehicle must particularly be a company
The key advantage that a Singapore fund has over an offshore fund is the access to Singapore’s large tax treaty network with over 50 countries.
Enhanced Tier Fund Management Scheme
This scheme was introduced to provide greater flexibility to the managers to source investors. There is no restriction on the residency of the investors or the fund vehicles. For funds under this scheme there is no cap on the percentage of Singapore investors. In order to qualify under this scheme the scheme must be approved by MAS and include a minimum fund size of SGD50 million at the time of application. The enhanced tier is open to fund vehicles in the form of companies, trusts and limited partnerships.
Fund Management Incentive Scheme
The FSI-FM scheme aims to promote fund management sector in Singapore. This incentive provides a concessionary tax rate of 10% for fund management and investment advisory activities, subject to certain conditions. For new applicants to qualify for a minimum 5 year award, the applicant:
- must be licensed or exempted from having a CMS license in respect of its fund management or investment advisory activities
- must have at least three professional staff engaged only in fund management or investment advisory services. Such professionals must earn a basic monthly income of more than SGD 3,500, and is engaged substantially in qualifying activities.
It must be noted that MAS will assess other factors such as growth targets in terms of assets under management, business spending etc while considering the applicants under this scheme
Investors are increasingly considering hedge funds as a source of diversification. Singapore implements the appropriate responses to build strong foundations for the fund administration and domiciliation activities. The strong fundamentals will enhance Singapore’s status as the Asian magnate of the fund management industry attracting capital, talent, managers and opportunities to build a thriving industry ecosystem.
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