Shifting Focus of Hedge Funds: From West to East
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11 April 2011
Hedge funds in the US and UK have come under greater scrutiny from regulators in the aftermath of the financial crisis. New York currently accounts for about 45% of global hedge fund assets, while London accounts for about 15%. But recent proposals regarding hedge fund regulations have not only prompted fund managers to cancel or delay plans to set up new shops in London and New York, many are moving their offices to Asia, mainly to Hong Kong and Singapore. As a result more Asian hedge funds from Hong Kong and Singapore are gaining prominence and market share. The following can be attributed as drivers affecting this shift: • Stable economies, workforce, less stringent regulations favoring financial services, good financial infrastructure in Hong Kong and Singapore. • Tax incentives, licensing exemptions offered by Singapore and Hong Kong governments. • Extensive tax treaty network with other countries which reduces tax liability in treaty countries. • Easy access to Asia’s growing pool of investors whose risk appetite is also on the rise. • Market conditions and high economic growth potential (India and China) – managers who previously invested in Asia from offices in London or America now prefer to be located in the region within same time zone and with easier access to local information. • Investment firms have had to separate their prop desks from other activities – many ex prop traders are setting up their own shops in the region. As a result of these, assets managed by hedge funds in Hong Kong and Singapore has recovered fast post crisis. Though it hasn’t got back to pre crisis levels yet, these two countries have seen significant number of new hedge funds entering the market in the last 12 months. While the two countries look similar in many aspects with respect to the hedge fund industry, there are subtle differences. While Singapore’s policy framework is more relaxed, Hong Kong has stringent regulatory set up. Hong Kong is closer to mainland China and has better access to Chinese markets and investors. This factor coupled with the fact that Hong Kong had a year’s head start over Singapore regarding hedge fund entry has made Hong Kong the biggest centre for hedge funds in Asia – but Singapore is catching up fast. In both countries the industry is concentrated by top few players; in Hong Kong top 20 funds account for 56% of industry AuM while for Singapore top 7 firms account for 20% of total AuM. Singapore attracts a larger proportion of smaller funds (0-50m) while Hong Kong draws a larger proportion of bigger funds (100-500m funds); this is helped by a regulation by Monetary Authority of Singapore (MAS) which proposed managers with less than $183 million and serving less than 30 investors need not be licensed. This competition between the two countries to attract hedge funds is likely to continue in the future and the industry is expected to register high growth in AuM in the next 12 to 18 months.