Being relatively new to the financial industry is not something you should be ashamed of. After all, everyone has to start somewhere.
Those successful people didn’t just magically appear out of nowhere conducting and playing with the big leagues. They began by actually being clueless.
So if you have no idea, in this case, about hedge funds, then don’t worry because we have got you covered.
As a Singaporean wanting to learn about one of the thriving industries in the country, it is very important that you know what a hedge fund is.
Below are the things you need to know about it.
What is a Hedge Fund?
Lets us start with the basic by defining hedge fund.
One of the first misconceptions from people about hedge fund is that it is a type of investment. But we are here to clear that out and tell you it is not.
A hedge fund is a sort of investment partnership or pooled investment structure that is setup by a money manager or registered investment advisor.
Through this, investors provide the capital to the hedge fund managers and give them autonomy over their investments.The pooled investment structure is often organized as either a:
- Limited partnership
- Limited liability company
The second one has become much more common these days because of its major advantages over competing incorporation forms.There are four key characteristics that define hedge fund. They are as follows:
- Only open to accredited or qualified investors – This points to how investors who would like to avail hedge funds need to have certain net worth requirements.
- Wider investment latitude – Hedge funds could basically invest in anything, which includes but not limited to land, real estate, stocks, derivatives, and currencies.
- Often employ leverage – To increase the returns, hedge fund will sometimes use borrowed money.
- Fee structure – The fee structure of hedge funds charge both an expense ration and a performance fee, which is commonly “Two and Twenty”—2% for asset management fee and 20% cut of any generated gains.
#1 What a Hedge Fund Does
In the hedge fund, the hedge fund manager is given by the investors a capital to raise the money. After that, the fund manager goes and invests the money according to his/her own complex strategies or instruments from outside investors.
The aim of hedge funds is to produce a positive absolute return in all market condition by going short or betting on falling prices as well as going long or relying on rising prices.
There are many types of hedge funds such as:
- Those that specialize in ‘long-only’ equities – they only buy common stock and never sell short
- Those that specialize in private equity – they buy entire privately held businesses, and sometimes taking them over, improving the operations, then sponsoring an initial public offering
- Those that trade junk bonds
- Those that specialize in real estate
- Those that put money to work in specialized asset classes like patents and music rights
#2 Hedge Funds in Singapore
Hedge funds have certain qualities that only apply to certain countries. So let us take it nationally and talk about hedge funds in Singapore.
It is written in the Singapore Code on Collective Investment Schemes the definition of hedge fund, which goes:
“There are different characteristics and investment strategies that define hedge funds. In general, a hedge fund seeks to deliver an “absolute” return independent of the directional move of equity, fixed income or cash markets.“
When considering whether a hedge fund falls within these Guidelines, the Monetary Authority of Singapore (MAS) would look at, among others. The following:
a) Strategies that use leverage, short selling, arbitrage, derivatives; and
b) Investment in non-mainstream asset classes i.e. investments other than listed equities, bonds and cash.
Furthermore, there are two classifications of hedge funds; they are:
- Domestic Funds (Onshore) – Singapore domiciled funds; meaning they are governed by the Hedge Fund Guidelines set out in the Code on Collective Investment Scheme issued by the MAS. These funds can be offered to both domestic and foreign investors but it is conventionally marketed to domestic investors only.
- Foreign Funds (Offshore) – These funds are established in jurisdictions other than Singapore. It can be marketed to domestic investors under certain conditions only.
Hedge funds are distributed to retail investors generally through distributor banks and licensed financial advisors. Those non-retail funds are distributed, on the other hand, through private banks and other exempt institutions.
#3 Licensing Requirements: How To Register For A Hedge Fund
If you want to apply for hedge funds, then you have to meet licensing requirements for it.
Accredited Investor & Retail Investor
For investors to qualify with hedge fund investment you will need to be an accredited investor, meaning you must meet the net asset exceeding S$2 million (with S$1 million counting only for property assets) or a corporation with net assets that exceed S$10 million.
Retail investors can still invest in some hedge funds which have obtained a Capital Markets Services (CMS) License from the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (Chapter 289) (SFA). Such hedge funds offering is called Authorized unit trusts.
If you are a fund manager who is operating with less than 30 qualified investors, then you are exempted from holding a license.
The fund managers, on the other hand, who are planning to market a fund to retail investors will have to obtain a Capital Markets Services License.
This can be acquired from the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (Chapter 289).
You will have to meet the minimum capital requirement for the license.
Basically for those who needs to get a Capital Market Services License are engaged in one or any of the activities below:
- Dealing in securities
- Trading in Futures contracts
- Securities financing
- Providing custodial services for securities
- Fund Management
- Leveraged Foreign Exchange trading
- Advising on corporate finance matters
- Real Estate Investment Trust Management
Those offshore fund managers that are promoting to Singapore investors must be licensed and regulated in jurisdiction of its principal place of business. It must also be fit and proper.
Offshore hedge funds for retail investors in Singapore, on the other hand, are called Recognized unit trusts.
Investment advisors promoting a fund would need a Financial Adviser’s License (FA License). The same exemption goes for those who act as a financial adviser in less than 30 accredited investors.
Those who are engaged in the following activities must get an FA License, unless exempted:
- Marketing of unit trusts
- Offering of life insurance products
- Advisory services on investment products including life insurance policies, foreign exchange contracts, etc.
- Issuance of investment reports
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.