How to Open a Hedge Fund business
Global capital is moving towards Asia countries, which are outperforming in economic growth compared to other parts of the world. As a major financial hub in the region and all over the world, Singapore is attracting more hedge funds, both foreign and start-up, to meet the increasing demands for capital. This guide will provide you with an overview of this industry, along with important requirements, regulations, and necessary steps on how to start a hedge fund in Singapore.
What is a hedge fund?
According to the Securities and Futures Act by the Monetary Authority of Singapore 2001, there are many investment strategies and characteristics that define a hedge fund. Generally, it is a company which delivers a complete return that independent of the move of cash markets, fixed income or equity. To identify if a fund meets these requirements, here are two factors to consider:
- Investments in non-mainstream classes of assets other than cash, bonds, and equities
- Strategies which use derivatives, arbitrage, short-selling, and leverage
Structures of Hedge Funds
Based on the location, hedge funds can be divided into two forms:
- Offshore or foreign funds
- Onshore or domestic funds
Domestic funds could be offered to both foreign and domestic investors, but it is often marketed to only domestic clients. Offshore funds could also be market to most domestic investors, subject to several conditions.
Licensing Requirements for Hedge Funds
A hedge fund serving no more than 30 qualified investors can be exempted from acquiring licenses licensing. If you plan to market to retail investors, then it requires to get a License of Capital Markets Services the MAS. A minimum capital requirement should be met to be qualified for this license. Offshore hedge funds marketing to domestic investors in Singapore must be regulated or licensed in the jurisdiction of the principal place. The investment advisers promoting a hedge fund should have a License of Financial Adviser.
The following activities will be regulated by the Securities and Futures Act and require a license from the MAS:
- Trade in futures contracts
- Deal in securities
- Trade leveraged foreign exchange
- Advise on corporate finance
- Manage funds
- Securities financing
- Provide custodial services
Overview of Hedge Fund Regulations
1. Retail investor promotion regulations
It is allowed to promote a hedge fund to retail investors if it is a recognized or authorized company. The minimum requirements for both offshore and onshore funds are:
- Capital guaranteed/protected hedge fund: no minimum
- Hedge fund-of-fund: S$20,000
- Single hedge fund: S$100,000
There are many measures to protect the interests of retail investors, including the disclosure of uncertainties and risks of the returns. That’s why marketing materials should emphasize the possible risks and reveal information such as charges and fees payable.
2. Accredited investor promotion regulations
Onshore and offshore hedge funds could only offer their services to accredited investors as required by the Securities and Futures Act. More specifically, these investors should have a minimum annual income or total net size of asset exceeding a specific amount or at a minimum of S$200,000 for each transaction. This rule can be applied to both domestic and foreign hedge funds.
But unlike hedge funds providing their services to retail investors, restricted onshore and offshore hedge funds only offer to the accredited investors which aren’t required to be in compliance with any investment guideline. Unlike offers to those retail investors, there will be no requirements for any prospectus and other offering documents.
3. Manager regulations
The managers of single hedge funds should acquire expertise and knowledge in managing these schemes. When investment decisions are made to advisers or sub-managers, they should also have expertise in the area. The professional qualifications, experience, performance history, and assets under management will be counted for assessing their expertise. Also, the managers should have at least two executives with more than five years of experience in managing hedge funds.
4. Reporting regulations
The managers of hedge funds should prepare and provide the trustees with the annual audited reports and accounts, semi-annual reports and accounts, as well as quarterly reports. These reports must reveal the top ten holdings and the portfolio statement. The performance payable or fees paid by the scheme for these periods should also be disclosed.