Emerging Markets, May 2010 (with Sid Verma)

Singapore may lose some hedge fund managers because of a proposed tightening of regulation announced last week, but will be stronger as a consequence, a minister said yesterday.

“Whenever we make changes, there will be some who might find it a little less attractive. We accept that,” said Lim Hwee Hua, Second Minister in Singapore’s ministries of finance and transport.

“But it’s a net consideration. We always know there will be others who will be glad we did what we did, and over time there will be new people who come in.”

On Tuesday the Monetary Authority of Singapore announced a review of the regulatory regime for fund management. It proposes to tighten the exemption regime for hedge funds which excuses them from holding a capital markets services licence provided they manage funds for 30 or fewer sophisticated investors. The review of this regime appears to be a response to global calls for greater regulation of private pools of capital: The MAS said it was to ensure “the regulatory regime keeps pace with industry and regulatory developments globally.”

“It’s not just targeting hedge funds,” said Ms Lim. “Our regulations, our rules and our incentives all evolve with the marketplace. There’s nothing cast in stone we will not change.”

These will be the first significant changes to regulation of hedge funds since Singapore eased regulations for them in 2002 in order to build an industry rivaling Hong Kong’s. It worked: Singapore has 138 single strategy hedge fund managers, according to the Alternative Investment Management Association, and oversees US$34.9 billion, the second biggest hedge fund industry in Asia after Hong Kong.

While the proposed changes do increase stringency, they stop short of doing so across the whole industry. Funds with less than $250 million under management would remain exempt from licensing. Asked about the logic of this position, Ms Lim said the measure was still under consultation and deferred further comment to the MAS, which has given participants until May 31 to respond.

Hedge fund professionals, some of whom feared greater restriction, have been generally positive about the changes. “While at the smaller end of the industry there may be some reorganisation and consolidation, generally the proposed regulations reflect current best practice without imposing arbitrary or onerous requirements that may stifle industry growth.,” said Peter Douglas, who runs the Singapore-based hedge fund consultancy GFIA and is an Asia Pacific council member of AIMA.

Nevertheless there is a question whether Singapore can continue to thrive as a financial centre if its renowned ease of doing business is in any way impeded. Similarly its highly successful private banking industry, which has grown in part because of the degree of privacy it grants clients, is under international pressure as other private wealth centres like Switzerland have been pushed to give greater access to client information.

“Ultimately what we want to make sure is that we remain pro-business to whatever financial services providers would want to do in Singapore,” Ms Lim said. “But at the same time we must maintain the stability, the integrity of the system as well. This is part and parcel of the overall refinements we will always do from time to time.”

Asked about international financial regulation, she added: “The financial services industry in particular is extremely innovative, and I am quite sure there will be instances down the road where we would encounter the same set of issues in a different form… We have the challenge of trying to decide how much regulation or deregulation to adopt.”

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