Setting up a Hedge Fund in Singapore
What Is a Hedge Fund?
The Monetary Authority of Singapore’s (MAS) has a Code on CIS, or Collective Investment Schemes, and according to this code, there are certain investment strategies and characteristics that differentiate a hedge fund from other type of funds. Generally, a hedge fund aims to offer investors a positive return, regardless of how the equity, cash, or fixed income markets move. Compared to other funds, they also tend to undertake a wider range of investment activities and invest in a broader range of assets. That is why, when considering whether a particular fund is a hedge fund, MAS will look at two criteria. If the fund meets these two criteria, then it is likely that MAS will consider it a hedge fund:
- 1. Said fund engages in various investment strategies that make use of leverage, short selling, derivatives, arbitrage and
- 2. Said fund invests in asset classes that are non-mainstream, for example, investments other than bonds, listed equities and cash
Are There Different Types or Categories of Hedge Funds?
There are two main hedge fund structures: (1) onshore funds and (2) offshore funds.
Onshore funds are funds that are constituted in Singapore and are consequently subject to Singapore’s licensing and regulatory regime for hedge funds. Onshore funds can be marketed to domestic and foreign investors, but in practice, they are mostly marketed to domestic retail investors. Onshore funds are permitted the following fund structures:
- Open-ended unit trust funds
- Close-ended funds, for example, corporations
- Limited Liability Partnerships (known as LLPs)
Offshore funds are funds that are constituted outside Singapore, in offshore jurisdictions, and are thus subject to offshore legislation. Under certain conditions, offshore funds can be marketed to domestic investors in Singapore. There is a class of investors who often prefer offshore funds due to the privacy offshore funds offer them.
How Are Hedge Funds Doing in Singapore?
Singapore has become one of the region’s most important hedge fund center, and is in close competition with Hong Kong. There have been several factors that have contributed to the healthy growth of Singapore’s hedge funds: tax incentives available to fund managers, good access to the growing pool of Asian high-net-worth investors and licensing exemptions for some fund managers. Add Singapore’s talented workforce, relatively stable economy, forward-thinking business environment, the reasonableness of the central bank’s industry regulations plus excellent development and infrastructure… you can begin to understand why Singapore’s doing well when it comes to being a hedge fund center.
So What License Do I Need to Get to Set up a Hedge Fund?
If you’re running a small or boutique hedge fund, one that has less than 30 qualified investors, you’re exempted from holding a license. All other fund managers (unless specifically exempted) need hold only one license, either a Capital Markets Services License or a Financial Advisers License, in order to conduct one or more of the regulated financial services activities mentioned below.
Who Needs a Capital Market Services License?
If you’re engaged in one or any of the below activities, which are regulated by the Securities and Futures Act, you’ll need to apply for a Capital Markets License:
- Dealing in securities
- Trading in Futures contracts
- Securities financing
- Providing custodial services for securities
- Fund Management
- Leveraged Foreign Exchange trading
- Advising on corporate finance matters
- Real Estate Investment Trust Management
Who Needs a Financial Advisers License?
If you’re engaged in any of the below activities, which are regulated by the Financial Advisers Act, you’ll need to apply for a Financial Advisers License:
- Providing advice on investment products. This include futures contracts, securities (and unit trusts), life insurance policies (including investment-linked life insurance policies), foreign exchange and leveraged foreign exchange contracts, and other structured products.
- Issuing reports on investment products.
- Making arrangement for life insurance products.
- Marketing collective investment schemes, for example, unit trusts.
Therefore, if you’re a corporation or person whose business will be in any of the regulated activities mentioned above, you’ll need a CMS/FA License or a CMS/FA Representative License, unless, as mentioned above, if you’re a fund manager who has less than 30 qualified investors or you are specifically exempt from holding a license under other conditions. If you work as a hedge fund manager, and you’re operating your hedge fund under one of the exemptions, you can market the fund you manage, but, without a license, you will not be able to market any third-party funds, Another thing to note about operating under an exemption is that you’ll have no capital requirements. But, exempt entities have to ensure compliance with the same requirements on market practices and conducts as do licensed entities. For more details on the licensing requirements and specific exemptions, you can refer to our “Which Licenses do you need to run a Financial Services Business in Singapore?” guide.
The Licensing Requirements for Offshore Fund Managers
If you’re an offshore fund manager who wishes to market offshore funds to domestic investors in the island-state of Singapore, you’ll have to be licensed or regulated under the offshore jurisdiction, and you must meet the requirement of being ‘fit and proper’.
Marketing Onshore Funds to Retail Investors in Singapore
Disclose the requirements of the funds – Hedge fund marketing materials, including the hedge fund’s prospectus’ cover page, should disclose the inherent risks involved in investing in a hedge fund. The materials should also disclose important information pertaining to the hedge fund in question. For example: disclosing that there will only be limited information about how the hedge fund schemes will be managed, or that some investments may not be actively traded or involve uncertainties, or that a large proportion of the underlying hedge funds will be subject to minimal regulation and thus, there will be limited liquidity, and so on. There is a minimum initial subscription requirement – (1) For single hedge funds, the minimum initial subscription is SGD 100,000 per investor (2) For fund of hedge funds (FoHF), it is SGD 20,000 per investor (3) For capital protected or guaranteed hedge funds, there is no minimum subscription amount. The Fund Managers should have proper qualifications – If you’re working as a hedge fund manager, you should have a minimum of 2 executives. Each of the executives must have, at the very least, 5 years’ worth of hedge fund management experience. FoFH Managers require an additional 3 years of FoFH management experience. The investing in other schemes – For Singaporean single hedge funds, they may invest in another single hedge fund, one which is not a feeder fund. And, similar to that, a Singaporean fund of hedge funds (FoHF) can invest in another FoHF, one which is only investing directly in other hedge funds, not through another FoHF or feeder fund. There must be limited liability – All investors must have limited liability. That is, their liability is limited to the amount they’ve invested in the scheme. Fund of Hedge Funds (FoHF) need diversification – A FoHF should have sufficient diversification, across, at the very least, 15 hedge fund managers. Please go to the Monetary Authority of Singapore’s (MAS) website to check out MAS’s Guidelines for Retail Hedge Funds.
Marketing Offshore Funds to Retail Investors in Singapore
Has to be recognized by the MAS – The manager of the offshore fund must either be licensed, or regulated under the offshore jurisdiction of where the offshore fund is located. The manager must also be deemed to be good character, as well as being ‘fit and proper’. Approved Prospectus – The profile statement or prospectus of the offshore fund must be approved by the MAS. Offers adequate protection – The protection provided by the offshore jurisdiction, where the scheme was constituted, to investors must be comparable to the protection provided by the Singapore Securities and Futures Act to the investors of onshore funds. Similar investment guidelines – The offshore jurisdiction that governs offshore funds must have investment guidelines that are substantially similar to those of Singapore’s. It is not a requirement that the foreign fund manager move to Singapore in order to market the offshore fund. But, you should be aware that the scheme must have a Singapore-based representative; this representative will be a liaison between the foreign manager and the local Singaporean investors. This Singapore-based representative must be one of three things: an individual, a company incorporated in Singapore, or a foreign company that’s been registered in Singapore under the Companies Act. There is a minimum initial subscription requirement – (1) For single hedge funds, the minimum initial subscription is SGD 100,000 per investor (2) For fund of hedge funds (FoHF), it is SGD 20,000 per investor (3) For capital protected or guaranteed hedge funds, there is no minimum subscription amount. Prospectus must be lodged – There has to be prospectus, and it has to be in compliance with the Securities and Futures Act. This prospectus must then be lodged as well as registered with MAS. Must manage minimum amount of funds – The fund manager in question must manage, at the very least, SGD 500 million’s worth of discretionary funds in Singapore.
Marketing Onshore and Offshore Funds to Accredited Investors/Other Relevant Persons in Singapore
If an onshore or offshore hedge fund is marketed to accredited investors, who are defined in Sec 4(A) of the Securities and Futures Act, then there will be no need to submit a prospectus or any sort of offering document to the MAS. Note: Accredited Investors are those that have a minimum annual income or total net asset size exceeding a certain amount, as stated in Sec 4(A) of the Securities and Futures Act, or have a minimum of SGD 200,000 for each transaction.
Marketing Onshore and Offshore Funds to Institutional Investors in Singapore
If an onshore or offshore hedge fund is marketed to institutional investors, who are defined in Sec 4(A) of the Securities and Futures Act, then there will be no need to submit a prospectus or any sort of offering document to the MAS. Note: There will also be minimum subscription requirements.
Does Singapore Offer Tax Incentives for Hedge Funds?
Before we go into the tax incentives available to hedge funds, let’s go through a quick lesson on how taxation in Singapore works. The island-state’s taxation is based on territory: individuals and companies are taxed on Singapore-sourced income. Foreign-sourced income, like dividends, service income, branch profits and so on, will be taxed when it is remitted, or deemed to have been remitted, into Singapore – unless that income has already been subjected to headline tax rates of at least 15% in its source jurisdiction. It may seem simple, this concept of determining whether the income is local-sourced or foreign-sourced, but, in reality, the application of territorial taxation can be incredibly complicated and contentious. Therefore, problems in taxation should be taken on a case-by-case basis, as each case is unique, and there is no one universal law or rule that will solve everything. Now, when we go to hedge funds, a good rule of thumb in determining the income’s source is to look at the place of business. Let us take the example of an offshore hedge fund, managed by a fund manager based in Singapore. This offshore hedge fund may be liable for tax in Singapore, due to the Singapore-based fund manager’s active role in managing the fund’s investments. The fund would be deemed to be “carrying out business in Singapore”; any income derived from the fund may then be considered Singaporean-sourced income, and with that, liable to be taxed in Singapore. However, there are a handful of tax incentives and exemption to help funds reduce or eliminate their tax liabilities.
The Tax Exemptions for Offshore Funds
An offshore fund managed by a fund manager who is based in Singapore is exempt from paying Singaporean tax on “specified income” earned from designated investments, as long as the offshore fund is a “qualifying fund”. “Specified income” refers to income in the form of profits, gains, interest and dividend from designated investments. What constitutes designated investments? These would be shares, stocks, securities, bonds, future contracts, deposits, and so one. An offshore is a qualifying fund if it:
- Is not 100% beneficially-owned by any Singaporean investor(s). Singapore investor(s) here refers to Singapore residents, whether individual or corporate entities, and Singapore-based permanent establishments of non-residents.
- Does not have a presence in Singapore, and
- Is only in the form of companies, individual accounts or trust.
It should be noted that a “qualifying investor” is also exempt from paying tax for any income derives from qualifying funds. An investor is a qualifying investor if they are:
- An individual investor
- A bona fide non-resident, non-individual investor that:
- o Does not have a present or run any business activity (other than that of being a fund manager) in Singapore, or
- o Has a Permanent Establishment in Singapore, but who does not use any funds from its business operations/activities in Singapore for the purpose of investing in the qualifying fund.
- Certain specified Singapore government entities
- A Singapore corporate investor who owns not more than 30% of the qualifying fund. If the qualifying fund has 10 or more investors, then they should not own more than 50%.
The Tax Exemptions for Onshore Funds
The Singapore Resident Fund Scheme was introduced by the Singaporean government in 2006. Under the scheme, all of the tax exemptions mentioned above for offshore funds were extended to onshore funds (those constituted in Singapore) as well, subject to these conditions:
- The fund vehicle must be in the form of a company.
- The fund must have been constituted in Singapore. All of its administration has to be done in Singapore; and
- The fund has to be approved by the Monetary Authority of Singapore (MAS)
The tax exemptions afforded to onshore funds under the Singapore Resident Fund Scheme gives Singapore’s fund management industry a big boost. Why? It offers an additional advantage to Singapore’s rather extensive treaty network, helping in reducing tax liability in treaty countries that the onshore fund invests in.
What is the Enhanced Tier Fund Management Scheme?
The Enhanced Tier Fund Management Scheme will be in effect from 1 April 2009 to 31 March 2014. This enhanced tier scheme is a tax incentive that is available for funds that are at least SGD 50 million in size, at the time of application. Under the Enhanced Tier Fund Management Scheme, the residency status of the fund vehicles and investors will not be shackled with any restrictions. This scheme also applies to those funds that have been constituted as Limited Partnerships. Funds that come under this scheme will have the 30% (or 50%) investment limit imposed on resident non-individual investors lifted.
What is the Enhanced Tier Fund Management Scheme?
The Enhanced Tier Fund Management Scheme will be in effect from 1 April 2009 to 31 March 2014. This enhanced tier scheme is a tax incentive that is available for funds that are at least SGD 50 million in size, at the point of application. Under the Enhanced Tier Fund Management Scheme, the residency status of the fund vehicles and investors will not be shackled with any restrictions. This scheme also applies to those funds that are constituted as Limited Partnerships. Funds that come under this scheme will have the 30% (or 50%) investment limit imposed on resident non-individual investors lifted.
Concessionary Tax Rate available to Fund Managers
The Financial Sector Incentive Scheme for Fund Managers grants managers a 10% concessionary tax rate on fee income, subject to conditions and approval by MAS. To have access to this scheme, fund managers must have employed at least 3 investment advisory or fund management professionals. The basic monthly income of each of these professionals has to exceed SGD 3,500.