EUREKAHEDGE SINGAPORE SUPPLEMENT INTRODUCTION The first hedge fund in Singapore, a Japan focused long/short equities fund, was launched in 1997 with less than US$100 million. By the end of 2000 there were a handful of managers running various strategies out of the country and managing US$450 million. The growth in this industry was nurtured by Singapore s relatively inexpensive cost structure, a simple regulatory regime and a helpful tax environment. At this time the region was just emerging from the Asian financial crisis and managers were also starting to identify growth opportunities in the region. In the following few years a number of managers opened hedge funds in the country to utilise the opportunities afforded by Singapore s location and other advantages. Most of these funds were launched with less than US$5 million, mostly with capital from managers personal network, and over the next few years these funds grew to manage a substantial size. By the end of 2007 there were more than a dozen funds in Singapore with assets of over US$1 billion. Whilst Hong Kong and Japan also witnessed strong growth as hedge fund centres in Asia, most of the funds launched in these locations employed equity-based strategies while a greater proportion of hedge funds launched in Singapore employed fixed income and credit strategies, in line with the trading desks of investment banks in the country. Additionally Singapore s positioning as a regional hub of commodities and foreign exchanging trading was also instrumental in the development of a dynamic and diverse hedge fund industry. Singapore hedge funds witnessed strong growth in the 2000 to 2008 time period and the size of the industry peaked in 2Q 2008 with assets under management (AUM) reaching almost US$30 billion. The onset of the global financial crisis led to widespread losses and redemptions which resulted in a number of funds closing shop and AUM dropping to US$15 billion by the end of 2008. Figure 1: Industry growth since 2000 30,000 250 25,000 200 AUM (US$ billion) 20,000 15,000 10,000 150 100 Number of funds 5,000 50 - - 2000 2002 2004 2006 2008 2010 Sep 2012 AUM (US$ billion) (LHS) Total number of funds (RHS) Since the global financial crisis of 2008, the Singapore hedge fund industry has witnessed a challenging few years. Whilst managers have delivered strong performance on average, the hangover from the financial crisis resulted in an environment of low to negative asset flows. One of the reasons for the lack of asset flows has been the challenges faced by funds of hedge funds, which had traditionally provided a substantial amount of capital to Asian and Singapore boutique managers. Traditionally Singapore hedge funds started out small with capital from friends and family and were later also supported by seed money from funds of hedge funds. With this channel drying up, many Singapore hedge funds have struggled to raise assets in the 2009 to 2011 period. Additionally most Asian investors are more familiar with Asian long/short equity funds which have struggled to perform since the financial crisis. Other strategies that have performed well are less understood by investors, such as CTAs, quant and structured credit funds, and hence these strategies have not attracted the assets that were redeemed by more traditional hedge fund strategies. 1 THE EUREKAHEDGE REPORT NOVEMBER 2012
In addition to funds of hedge funds, investors in general have become more risk averse and have been holding on to cash or investing after substantially long due diligence periods. The situation was further exacerbated by the European debt crisis, but subsequently 2012 witnessed some capital being allocated to Singapore managers, as investors recognised that Asian markets offered greater growth potential with stronger economic fundamentals. Currently the size of the Singapore hedge fund industry stands at US$23 billion, managed by more than 200 hedge funds. INDUSTRY COMPARATIVE GROWTH TRENDS Table 1 shows growth in assets under management since 2000 in Singapore, Asian and global hedge funds. Since 2008 assets in Asian hedge funds have remained more or less at the same level, while those allocated to global hedge funds have grown significantly, primarily due to the growth in North American hedge funds. Asset growth in Singapore hedge funds also remained quite slow between 2008 and 2011, but witnessed substantial growth in the local industry in 2012. Table 1: Annual growth in Singapore, Asian and global hedge funds AUM AUMs (US$ million) Singapore Asia Global 2000 451 18,954 335,309 2001 532 22,777 423,891 2002 609 28,240 475,625 2003 2,107 45,420 759,288 2004 4,803 74,121 1,139,931 2005 8,605 106,398 1,246,154 2006 13,375 132,840 1,542,804 2007 27,114 176,015 1,886,164 2008 18,500 126,379 1,472,549 2009 14,101 117,344 1,481,194 2010 15,875 128,554 1,675,138 2011 17,697 123,745 1,705,695 Sep-12 22,987 127,782 1,776,182 Note: All figures are in US$ million What s interesting in table 1 is that while Singapore has certainly lost considerable assets since the financial crisis as a percentage of total assets, in Asia it has actually grown to account for 18% to the regional AUM. Figure 2 shows the percentage growth in the number of Singapore, Asian and global hedge funds. Although Asian funds grew at a greater rate than Singapore and global hedge funds between 2000 and 2007, the trend has turned in Singapore s favour since the financial crisis primarily because of the slowdown in the number of hedge fund launches in Japan and Australia. This is also partly due to the high pace at which Singapore is becoming an increasingly important financial centre in Asia. In this growth the city-state has outpaced Hong Kong, Shanghai, Tokyo or Sydney by encouraging more funds to set up locally and more investors to pass through town on a regular basis. Additionally more HNWs are moving their assets from Switzerland and generally Singapore is perceived as a location of choice for private banking and gold storage. THE EUREKAHEDGE REPORT NOVEMBER 2012 2
Figure 2: Comparative growth in Singapore, Asian and global hedge funds 700% 600% 500% 400% 300% 200% 100% % Growth by number of funds 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 June 2012 Singapore Asia Global Strategies Figures 3a-3b: Strategies breakdown by AUM Asian Hedge Funds ex-singapore Macro, 4.0% Relative value, 3.4% Others, 1.9% Multistrategy, 16.9% Arbitrage, 3.7% Long/short equities, 53.1% CTA/ managed futures, 6.9% Distressed debt, 2. Event driven, 3.6% Fixed income, 4.2% Singapore Hedge Funds Relative value, 0.1% Others, 1.0% Arbitrage, 1.0% Multistrategy, 22.1% CTA/ managed futures, 6.4% Macro, 31.1% Distressed debt, 0.9% Event driven, 11.8% Fixed income, 4.0% Long/short equities, 21.5% Figures 3a and 3b show the breakdown of assets under management in Asian hedge funds and Singapore hedge funds by strategies. Most of the assets in Asian hedge funds are allocated to long/short equity funds but in Singapore global macro funds dominate the landscape, with nearly a third of the total assets under management. As discussed earlier, the development of the Singapore hedge fund industry was driven by synergies with the local investment banking operations. A number of banks were running credit and fixed income desks from Singapore, which was further reinforced by the concurrent development of Singapore as private banking hub, leading to the availability of local talent experienced in nonequity strategies. Currently, four out of the largest 10 hedge funds in Singapore employ a global macro mandate, which is in sharp contrast to the overall Asian hedge fund industry. 3 THE EUREKAHEDGE REPORT NOVEMBER 2012
Head office location Asian hedge funds Singapore has raised its profile as a hedge fund centre over the years but its standing in the larger Asian hedge funds industry differs when comparing which centres manage the greatest amount of capital and which houses the largest number of managers. Singapore and the UK are tied for second place in terms of fund population over the years the trend has shifted significantly towards managers based in Asia, and Singapore has benefitted from this. In 2007 Singapore was in fifth place in the same measure while the UK and US took the top two spots. In terms of assets under management, Singapore funds remain behind their American and British counterparts, primarily because hedge fund allocation is still picking up in the regional institutions, while allocating to hedge funds has been part of portfolio building process in the West for quite some time now. Figures 4a-4b: Asian hedge funds breakdown by location Asian hedge fund location by number of funds Hong Kong, 20% United Kingdom, 15% Singapore, 15% United States, 14% Australia, 10% Others, 1 China, 1% France, Luxembourg, 2% Switzerland, 2% Japan, 5% Asian hedge fund location by AUM United Kingdom, 18% Singapore, 18% United States, 15% Hong Kong, 22% Australia, 14% Others, 6% Cayman Islands, 1% Switzerland, 1% Monaco, 1% Luxembourg, Japan, 2% Prime brokers The prime brokerage landscape in Singapore also differs significantly from that of Asia based non-singapore hedge funds. Whilst the largest global players also dominate the broader Asian prime brokerage industry, Citibank takes the lead in Singapore. Although in terms of the number of funds the usual suspects are still ahead Citibank has a greater share of the assets under management in Singapore primarily due to a few large clients. This breakdown is also quite different THE EUREKAHEDGE REPORT NOVEMBER 2012 4
from what it was pre-financial crisis. At that time the top two prime brokers in Asia (Goldman Sachs and Morgan Stanley) were also the top two (in terms of AUM) in Singapore. Table 2: Prime brokers by AUM Asia based (ex-singapore) HFs PB Share by AUM Goldman Sachs 29.2% Morgan Stanley 21.7% Deutsche Bank 14.1% UBS 13.6% Credit Suisse 7.5% Bank of America Merrill Lynch 4.6% Citibank 3.1% Newedge 1.7% Barclays 1.2% Nomura Group 1.2% Others 2.1% Singapore PB Share by AUM Citibank 22.9% UBS 21.5% Morgan Stanley 14.6% Deutsche Bank 12.7% Goldman Sachs 11.1% UOB Bullion and Futures 5.2% Credit Suisse 3.7% Barclays 2.7% Bank of America Merrill Lynch 1.7% Newedge 1.4% Others 2.4% Administrators In terms of hedge fund administrators, HSBC and CITCO dominate the Singapore hedge fund administration business, and together account for more than 55% of the total AUM. As with other service providers, the administration industry in Singapore has also become more varied over the last four to five years in mid-2008 HSBC accounted for over 50% of the industry though its share has declined over the last few years as more administrators have entered the market. Table 3: Hedge Fund Administrators by AUM Asia based (ex-singapore) Hedge Funds Administrator Market Share HSBC 33.02% CITCO 14.8 State Street 8.74% Internal 7.86% Citibank 5.24% Goldman Sachs 3.31% Prime Fund Solutions 2.29% Chuo Mitsui Trust & Banking 2.21% JP Morgan 2.18% Daiwa 1.91% Others 18.42% Singapore Hedge Funds September 2012 Administrator Market Share HSBC 37.6 CITCO 17.56% JP Morgan 12.3 LaCrosse 6.5 RBC Dexia Investor Services 3.21% Multiconsult 2.87% SS&C GlobeOp 2.74% Crowe Horwath First Trust 2.3 Northern Trust 2.15% Apex 1.95% Others 10.69% 5 THE EUREKAHEDGE REPORT NOVEMBER 2012
Performance Singapore hedge funds have also delivered significant returns 1 over the last 10 years, outperforming the markets and keeping pace with other Asia based hedge funds. Figure 5: Performance of Singapore versus Asian hedge funds 350 300 250 200 150 100 50 0 Dec-99 Jul-00 Feb-01 Sep-01 Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Singapore based funds Asia ex-singapore MSCI AC Asia Pacific Index The returns profile of Singapore hedge funds compares favourably against Asian hedge funds, and is significantly better than market index performance which is actually in negative territory since the start of 2000. As shown in table 4, annualised returns of Singapore hedge funds are higher than those posted by other Asia based hedge funds. The higher proportion of non-equity funds served to cushion the average losses among Singapore hedge funds in 2008, as equity markets crashed by over 45% during the year. In addition to that, the performance of Singapore hedge funds has been better than that of hedge funds based in other Asian cities in more recent years. Table 4: Performance statistics Singapore HFs Asia ex-singapore HFs MSCI AC Asia Pacific Index Total return since 2000 194.8% 187.0% -20.9% Annualised returns 8.8% 8.6% -1.8% Annualised standard deviation 8. 6.9% 16.1% Sharpe Ratio 0.8 1.0-0.2 Returns since 2008 33.7% 28.6% 17.9% 2008 returns -17.4% -17.7% -45.4% Skewness -0.1-0.6-0.7 R 2 (with market index) 0.55 0.75 1 For this section we developed bespoke indices for funds based in Singapore and those based in other Asian cities. All performance statistics are based on these indices. THE EUREKAHEDGE REPORT NOVEMBER 2012 6
Figure 6 takes a closer look at the performance of Singapore based hedge funds and that of hedge funds based in other cities in Asia. Over the last six years and nine months, Singapore funds have delivered an outperformance of more than 12% against the performance of other Asia based hedge funds. We attribute this outperformance to the higher proportion of funds investing in commodities, fixed income and also macro investing funds. Singapore hedge funds also display a lower correlation to the broader Asia Pacific markets than other regional hedge funds. The r-square measures of the two bespoke indices in figure 5 (since 2000) versus the MSCI Asia Pacific Index are given in table 4, showing that the returns posted by Singapore hedge funds are much less correlated with the underlying Asian equity markets than those posted by other Asian hedge funds. These figures imply that non-singapore based Asian hedge funds tend to be more long biased and further highlight the benefits of diversification amongst different hedge fund strategies. Figure 6: Performance of Singapore HFs and Asia ex-singapore HFs since Dec 2005 160 150 140 130 120 110 100 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Singapore Asia ex-singapore CONCLUSION The Singapore hedge fund industry has posted excellent growth over the last 10 years and remains one of the most vibrant hedge fund centres globally. Helpful policies adopted by the local government have encouraged a growing industry and the increasing importance of Singapore as a global financial centre has further strengthened the industry. Performance of local hedge funds has been strong and managers are increasingly finding it easier to attract assets from global investors. The proliferation of different hedge fund strategies is perceived as a strength of the industry as it offers various options to investors. In the current investment climate, the diversity of strategies and uncorrelated returns of the average 2 Singapore based hedge fund should prove attractive to investors, especially as recent global assets flows have shown a predilection for non-equity strategies. The industry is once again undergoing some changes amid new regulations introduced by the Monetary Authority of Singapore. We believe that the new regulatory framework will prove helpful to local managers as economies of scale and competition among service providers will reduce the costs of compliance and internal controls frameworks. Additionally, the various features of the new regulations are helpful in addressing some investor concerns. As such we believe that Singapore based hedge funds will post further growth in the coming years we expect the industry to cross US$30 billion in AUM by end of 2013. 2 Assuming that the bespoke Singapore hedge fund index from figure 5 represents the returns profile of the average Singapore based hedge fund 7 THE EUREKAHEDGE REPORT NOVEMBER 2012
REGULATORY UPDATE In August 2012 the Monetary Authority of Singapore (MAS) introduced a new regulatory framework for fund managers. The salient features of the new regulations are summarised below along with the results of a survey conducted by Eurekahedge on how easy or hard managers are finding the different aspects of the regulations. Company categories Currently known as Exempt Fund Managers, the EFMs will need to either hold Capital Market Services license or be registered with the MAS: a) Licensed Retail Fund Management Company (FMC): serving all types of investors b) Licensed Accredited/Institutional FMCs: AUM > S$250 million, must have Capital Market Services license, can only serve accredited investors but there is no cap on the number of investors c) Registered Fund Management Companies (FMC): AUM < S$250 million, less than 30 qualified investors Criteria for Licensing or Registration Competency the FMCs will be required to: a) Maintain an office in Singapore b) Have at least 2 directors with at least 5 years of experience (and meet the MAS fit and proper guidelines) c) Have at least 2 representatives residing in Singapore with at least 5 years of experience Base Capital Requirements: a) For FMCs serving accredited or institutional investors base capital requirements have been introduced at S$250,000 b) Licensed FMCs will be required to maintain financial resources that are at least 120% of operational risk requirements Figures 7-8: Survey results on competency and enhanced capital requirements 18% Competency requirements 27% Hard 15% Enhanced capital requirements Very Hard Already met the requirements 55% 12% Already met the requirements 67% 18-21% of hedge funds, mostly managers with smaller asset bases, indicate that hiring new staff and the new capital requirements will be problematic for them Compliance Arrangements: a) FMCs will be required to have put compliance arrangements in place that are commensurate with the nature, scale and complexity of their businesses, with the CEO and directors of the FMC ultimately responsible for all compliance and regulatory matters b) The compliance arrangements can be in the form of independent internal teams, support from an overseas holding company or third parties/service providers c) Directors will be expected to implement written policies for all aspects of the management company s operations and to make certain there are there are effective internal controls to mitigate risks THE EUREKAHEDGE REPORT NOVEMBER 2012 8
d) Licensed A/I FMCs should have an independent compliance function with staff who are suitably qualified and independent from the front office. Risk Management: a) FMCs will be required to put in place risk management frameworks which should take into account principles set out in the MAS Guidelines on Risk Management Practices b) Ensure competency of risk management function and independence from portfolio management function c) Appropriate, tools or metrics suitable to the nature, scale and complexity of the assets managed should be acquired or developed to ensure identification, measurement, monitoring and reporting of risks d) All policies, procedures and reports relating to the risk management function should be properly documented and maintained. Figures 9-10: Survey results compliance and risk management regulations 4 Hard Compliance and internal controls Already met the requirements 3 3 Risk management standards Hard Already meet the requirements 52% 21% 12% Implementing the guidance on compliance, internal controls and risk management is problematic for some managers Others requirements: a) FMCs should ensure independent custody of assets b) Independence of fund valuation and customer reporting function this could be in-house for larger funds or it could also be a service provider c) FMCs will be required to implement measures that mitigate any conflicts of interest and will be required to ensure adequate disclosure about any conflicts of interest. d) Independent annual audit of FMC this would include audit of compliance, risk management and internal controls Figures 11: Survey results on new requirements for custody, administration and FMC audit 15% 9% Custody, FMC Audit, Admin Hard Already met the requirements 7 Most managers already meet the requirements for custodial, FMC audit and administration The new MAS regulations were proposed almost a year ago via a white paper issued in 2011 as such it provided enough time for firms to prepare for new framework. Although the regulations were issued in August 2012 and the MAS 9 THE EUREKAHEDGE REPORT NOVEMBER 2012
provided six months to EFMs to register accordingly, responses from managers to the Eurekahedge survey indicate that the vast majority of managers feel that the timeframe of six months is adequate (figure 12). However, more than half of the managers have indicated that there are extra costs that they will now have to deal with. Figures 12-13: Survey results on implementation timeframe and extra costs associated It s a race against time 9% Timeframe No Significantly high costs 27% Extra costs No extra cost 12% Yes 88% Feeling the pinch 27% Not significant 34% More than half of the managers surveyed indicated concern over the increasing costs of management In addition to the extra costs involved, 55% of the managers have indicated that implementing the new regulatory framework will be moderately. Most of the issues seem to be regarding the compliance, internal controls and risk management protocols. Many managers do not consider these functions as their expertise, and since most of the funds in Singapore are relatively smaller operations, the extra costs associated are starting to hurt. Furthermore in an environment of high inflation and increasing costs of staff salaries and rentals, quite a few managers are now considering relocating from Singapore. According to responses to the Eurekahedge survey, 25% the managers in Singapore are thinking of shifting their hedge funds from Singapore to Hong Kong. Figures 14-15: Survey results on effect of regulations on capital raising and y in complying Overall y in complying 55% 15% Already in compliance 30% Maybe a little 3 Support capital raising Yes a lot 6% No difference 61% Over the years the Monetary Authority of Singapore has worked proactively to encourage the fund management industry in the country. To encourage continued growth in the sector, the authority has rotated consultation papers within the industry prior to the introduction of new regulations in part to provide a heads up on upcoming regulations. The new framework strikes an effective balance between sensible regulations which serve to protect investors as well as the industry and promote the country as an easy place to do business. Although 55% of managers indicate that they face certain ies in complying fully, there is increasing competition between service providers to capture this market, effectively making it more affordable. Additionally MAS has held various sessions, with the different service providers in attendance, to explain in detail how managers can get compliant. Increasing emphasis on fund set-up, risk management and internal controls since the financial crisis of 2008 has shown that investors will shy away from loosely regulated vehicles and funds that do not have proper structures in place and keeping this in mind the new regulatory framework will go a long way in addressing such concerns. THE EUREKAHEDGE REPORT NOVEMBER 2012 10