A View Of, And From, Singapore: Part One

We spoke recently with Peter Douglas, the founder and principal of Singapore-based investment consultant GFIA, about nature and nurture in Singapore, about the best place whence to manage one’s investments in Asia, and on kindred questions. The inquiry soon delved into the international comparison of regulatory regimes, and we will pursue that part of the conversation in a later piece.

Today, we will intersperse a transcript of the first part of our interview with pertinent quotations from a recent GFIA publication, its March 2012 “Asian Hedge Funds Note,” that also bear on Singapore and the broader region of which it is a part.

Quotes from the March Research Note, then, are in bold below, Douglas’ words in italics, and our questions in roman.

Research Note: In recent years up to 2011, the relevance of London or New York as Asian hedge fund centres has receded although last year we saw a definite spike in the numbers of Asian hedge funds run outside the region, possibly due to the larger global asset-gathering firms launching Asian product, or initiating greater coverage….

AAA: Why has Singapore achieved the prominence it has as a financial hub?

Douglas: It is more prominent in some fields than others. Certainly private wealth management is Singapore’s dominant suit right now as a financial center. Why has it attained such prominence as it has? That is a mixture of nature and nurture. Singapore has always been a trading hub due to its location, and this has allowed it over the centuries to develop as a professional and commercial services hub as well, which has anchored a capital markets ecosystem.

AAA: Suppose that I’m ready to open a hedge fund firm. I’m in a position to attract a lot of money, let’s say, from North American investors who are looking for Asian opportunities. I could try to run my fund long-distance from New York or London, but I’m a hands-on guy and think that I ought to be in an Asian city. How would you size up the attractions for me of Singapore vis-à-vis Hong Kong or Tokyo?

Douglas: First, you are wise not to try to run it long distance. That would be a disservice to your investors. Numerous studies have demonstrated conclusively that, in aggregate, indigenous funds consistently out-perform outsiders.

Second, Tokyo is politically (and this is reflected in the regulations and their implementation) quite unfriendly to hedge funds in ways that the Germans and French would appreciate. In late June for example, authorities in Japan imposed a fine and revoked the license of Edward Brogan’s fund, Japan Advisory one of the oldest established and largest hedge funds run from Tokyo, and now Brogan is in effect in exile from Japan.

You might consider Sydney. It’s a great place to hire qualified staff; it has a western legal system and a sophisticated lifestyle. Unfortunately, it is just too far from where the action is, in terms of visibility to international allocators.

Your choice will come down to Hong Kong or Singapore. Hong Kong remains the “gateway to China;” that phrase is a cliché, but it also represents a compelling appeal. It has roughly twice as many funds, and the industry is also roughly twice as large in aggregate size, as that of Singapore. That’s been true, at least roughly (though there has been some jiggling about in relative positions year by year) for as long as I can remember.

Hong Kong and Singapore have some strengths in common. Both have well-developed and regulated financial systems that are globally integrated, and functioning western-style legal systems.

Singapore has some life style advantages. The air is clean, for one thing, it can be easier to find places in international schools, and, given Singapore’s increasing status as an international wealth management centre, its service sector is highly developed. Also, Singapore’s more southern location gives you easier access to the ASEAN markets, and Singapore has a close historic and current relationship with India.

GFIA Research Note: Fewer investors are considering an increase in allocations to India, perhaps due to the “one step forward two steps back” reforms carried out by the Indian government which resulted in large swings in volatility.

AAA: Speaking of India, I read recently that the Reserve Bank of India wants to make life easier for foreign investors. Do you think there will be changes opening India up to FDI and, if there are, do you think a lot of hedge funds will be interested in taking advantage of that?

Douglas: If there were real deregulation and a real openness by India, then yes, plenty of fund managers would want to take advantage of this. Indian has a population of more than a billion people after all, and they may have a sounder institutional infrastructure than China. But moving to the first part of your question: I am very skeptical that recent talk will culminate in anything dramatic. The fact that the RBI now says it wants the Finance Ministry to make a move by no means implies it’s going to get it.