This post is also available in: 简体中文 (Chinese (Simplified))

Beginner’s Guide on Starting a Hedge Fund in Singapore

Starting a Hedge Fund in SingaporeSingapore’s developed infrastructure and government support for the wealth management sector have made it an ideal destination for investors. If you are thinking of starting a hedge fund as well, we provide you with a comprehensive guide in this article. On the other hand, you can also contact a corporate service provider for professional assistance to set up your business.

 

What is a Hedge Fund?

Hedge funds are actively managed alternative investments that employ non-traditional and risky asset classes or investment strategies. They have increased by about 2.5 percent in the last five years, but they continue to be controversial. Furthermore, due to the numerous regulatory and legal hurdles, starting a hedge fund can be time-consuming and costly.

Each hedge fund is custom to capitalize on specific market opportunities. There are several broad hedge fund strategies, including event-driven investing and fixed-income arbitrage. They are frequently classified based on the investment style of the fund’s manager. Fixed-income arbitrage hedge funds extract returns from risk-free government bonds while avoiding credit risk. Investors who use arbitrage buy assets or securities on one market and sell them on another.

In contrast, an event-driven strategy involves hedge funds purchasing the debt of companies that are in financial distress or have declared bankruptcy. Managers concentrate on senior debt. These are most likely to be repaid at face value or with the smallest haircut in any reorganization plan.

 

Types of Hedge Funds

There are two types of hedge funds. Based on their domicile, they are domestic (onshore) funds and foreign (offshore) funds. Domestic funds are Singapore domiciled and thus subject to the Hedge Fund Guidelines outlined in the Monetary Authority of Singapore’s Code on Collective Investment Schemes (the “Code”) (MAS). Onshore Funds typically use Trust and Company structures. Though as of 2009, Limited Partnership is also an available fund vehicle.

Foreign funds are funds that are established in countries other than Singapore. To establish a successful alternative investment management firm, an investment manager must have a proven strategy, relevant experience, and substantial business know-how. This article intends to provide a high-level overview of the process for would-be hedge fund managers looking into starting a hedge fund.

 

Registration Process for Starting a Hedge Fund

Starting a hedge fund necessitates a concerted effort on the part of the manager, sponsor, and key personnel who will form the fund’s and advisor’s core operating team. First, research and become an expert. Remember to read up on hedge funds and how they work. If possible, talk to company incorporation services experts.

Next, select a name for your fund that best describes your investment style and strategy. Then, decide whether to set up funds in Singapore as a corporation, unit trust, limited partnership, or an upcoming variable capital company (VCC).  Hedge funds are costly ventures with high startup costs that can reach well into the six-figure range. Therefore, before you take legal action, develop your strategy and raise some startup capital.

Raising capital is the most difficult challenge for an emerging hedge fund manager. You could start with one or more of the following sources for initial investment capital:

  • Your personal savings
  • Friends and family
  • Hedge fund seeders Colleagues Endowments or foundations

 

The simplest approach is to first establish a track record. This encourages people to trust you with their money. Once you’ve established a solid track record, you can launch your own fund. A common strategy is to hire a professional marketing team to sell your fund to outside investors.

 

3 Ways to Deal With the Legal Work for Starting a Hedge Fund

After you’ve secured the capital, you’ll need to work through the legalities of establishing the fund. If you plan to provide investment advice, you must first pass a test and register with the Securities and Exchange Commission (SEC). This is a legal requirement in some cases, and it’s a good idea in any case.  You’ll also need to register with the Internal Revenue Service (IRS) in order to obtain an employer identification number.

There are three paths you can take from there, depending on your budget and the level of professional assistance you require.

Consult a Lawyer

You should think about hiring an experienced hedge fund attorney to help you sort through the paperwork, which can be time-consuming. It will also keep you from making costly mistakes like misfiling or forgetting a form. There are many corporate service providers in Singapore that have a range of services that also include legal services. Contact 3E Accounting for more information.

Make Use of an Incubation Platform

Look for a new management platform solution. The business model of the emerging manager platform enables you to begin trading in your hedge fund and seek investors. You can do so while simultaneously building an audited track record within its larger legal structure.

Make Use of a Template Service

Use a hedge fund formation template service to cut costs and lower your startup expenses by 60 to 90 percent. These services provide you with access to the same legal templates that top-tier attorneys use. Hedge fund formation templates give you the freedom—and the responsibility—to build your fund from the ground up.

 

Licensing and Permits Requirements for Hedge Funds

A hedge fund that serves no more than 30 qualified investors may be exempt from acquiring licenses. On the other hand, if you intend to market to retail investors, you must obtain a Capital Markets Services License from the MAS under the Securities and Futures Act (Chapter 289) (SFA). To be eligible for this license, you must have a certain amount of capital.

Offshore hedge funds that market to domestic investors in Singapore must be regulated or licensed in the jurisdiction of the primary place of business. Investment advisers promoting a hedge fund must hold a Financial Adviser License.

License for Capital Market Services

Those who engage in activities governed by the Securities and Futures Act must apply for a Capital Markets Services License unless exempted. Dealing in securities, trading in futures contracts, securities financing, securities custodial services, leveraged foreign exchange trading, fund management, and real estate investment trust management are all examples of these activities.

The CMS License is only available to corporations. Unless an exemption applies, if an individual intends to act as a representative of the CMS License holder, he/she must obtain the relevant CMS Representative’s License.

Financial Advisor’s License

Those who engage in activities below that are governed by the Financial Advisers Act need to obtain a Financial Adviser’s License.

  • Providing investment advice on securities and unit trusts, futures contracts, life insurance policies (including investment-linked life insurance policies), foreign exchange and leveraged foreign exchange contracts, and other structured products
  • Creating arrangements for life insurance products issuing reports on investment products marketing collective investment schemes such as unit trusts issuing reports on investment products Issuing reports on investment products
  • Making arrangements for life insurance products
  • Promoting collective investment schemes such as unit trusts

 

Except for funds with fewer than 30 qualified investors. All other schemes and individuals engaged in any of the aforementioned activities must obtain the appropriate license unless specifically exempted.

The following areas are not covered by the Financial Services Act:

  • The Banking Acts governs the bank deposits
  • General insurance is not considered an investment product and is arranged by intermediaries in accordance with the Insurance Act.
  • Loans and mortgages are not regulated, and neither are investments.

 

Only corporations can apply for the FA license, and individuals acting as a representative of the FA license holder must obtain the FA Representative’s License unless exempted, similar to the CMS license.

Procedures for Obtaining Licenses

The application process for both CMS and FA licenses is the same.

  1. Fill out all application forms and send them to MAS with all supporting documents.
  2. Fee payment during the application process.
  3. Successful applicants will receive their CMS license or CMS Representative’s License, as well as an Annual License Fee Advice, which will be valid for 3 years.

 

The processing time for a CMS license is typically 6 months, so keep that in mind when making your business plans. The license must be renewed at least one month before it expires.

Starting a hedge fund has many different steps. You could handle it on your own but it’ll definitely smoothen the process if you hire a Singapore corporate service provider like 3E Accounting. This can smoothen your company registration in Singapore and lessen your hassle.

Starting a Hedge Fund in Singapore