Singapore, hedge funds and jurisdictional competition

Larry Ribstein —  30 July 2010

While the US, via Dodd-Frank, has increased its regulation of hedge funds by requiring registration and disclosure, one important jurisdiction is pulling back and poised to reap the benefits. Per Bloomberg, Singapore declined in April to require licensing of hedge funds and attracted several new hedge funds in May and June.

“Singapore did not shoot itself in the foot by putting up proposals that will kill off the business,” said Kher Sheng Lee, a senior associate in the financial services group at Philadelphia-based law firm Dechert LLP in Hong Kong. “While some places are moving towards over-regulation with rigid rules and increase in compliance costs, Singapore has attempted to go for sensible regulation.”

Singapore is vying with Hong Kong for a slice of the global $1.7 trillion hedge-fund industry as the region’s growth leads the world. Singapore has made it easier for hedge funds to set up shop on the island than in other Asian cities such as Hong Kong, where hedge-fund managers face the same licensing requirements as mutual-fund managers. * * *

The regulator has recognized the needs of startups and smaller managers “not to be overburdened by regulatory costs,” said Michael Coleman, chairman of the Singapore branch of the Alternative Investment Management Association. * * *

“Singapore has been as sensible and forward thinking as they can be about this,” said Peregrine Cust, founder of Prana Capital, which moved its investment team to Singapore from London in April. “It’s a very high-margin business, it brings lots of highly paid professionals into the local economy. It’s not going to take them that long to take this industry to critical mass.” * * *

Han Ming Ho, a partner at Clifford Chance, one of the first international law firms awarded a Singapore license, said he is handling more inquiries since the rules were announced. * * *

Singapore, where the top tax rate for individuals is 20 percent, is also attracting more managers after the U.K. increased the top rate of income tax to 50 percent and European regulators work on tougher rules. The island-state was named Asia’s most livable city in a Mercer Consulting survey in May.

Pure Capital, which uses computer models to pick trades, is “seriously considering” moving its head office to Singapore from London * * * “Europe is going to very much become the ‘old world’ and get left behind; the hedge-fund industry will move towards Asia- Pacific over decades to come,” Limbrick said. “We may yet be a year or two away, but we like Singapore’s attitude to encouraging new business.”

Last year I discussed at some length jurisdictional competition between global legal centers, focusing on my travels and discussions in Hong Kong and Singapore. Here’s a taste:

Partly because of their similarities, Hong Kong and Singapore compete for increasingly global rather than regional legal business. In my discussions I didn’t get a strong sense of each jurisdiction’s competitive strategy. That may be partly due the fast-moving nature of the global legal environment and the uncertainty of the roles to be played by various types of offshores. Moreover, the main players in each jurisdiction lack the control over their legal system that Delaware lawyers, for example, exercise. Singapore has long been dominated by Lee Kwan Yew, and is still basically operating under his vision. Hong Kong has China to contend with, subject mainly to China’s self interest and the loose constraints of HK’s SAR status and the Basic Law.

I gathered that Singapore has tended to regulate its financial institutions with a somewhat lighter hand than HK, though I’m still working on the specifics. Singapore evidently has been competing with Switzerland in offering privacy, though both have bowed recently to global demands for transparency. At the same time, Singapore may be more careful in deciding which financial institutions to admit to their zone of safety * * *

In general, the offshores are beginning to realize how to compete in a global environment. Onshores like the US seem increasingly clueless. Does it really make sense to yield to short-sighted demands for financial regulation if this causes the US to lose its edge as a global leader in finance? Does it make sense to cede access to one of the most exciting business environments in the world to other country’s citizens in order to grab a comparatively little more tax revenue?

These questions are even more timely in the wake of Dodd-Frank.

Larry Ribstein

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Professor of Law, University of Illinois College of Law