When visitors arrive at Singapore’s Changi Airport, they get both an immigration card and an application form for opening a hedge fund.

At least, that’s the joke now making the rounds. Singapore is gung-ho on hedge funds. Leading the charge is the Singapore government, which envisions its Southeast Asian city-state as the dominant regional center for private banking and alternate assets investing, and sees hedge funds as the way to get there.The government has done more than make bullish pronouncements. Its central bank, the Monetary Authority of Singapore, crafted regulations that both streamline the process for establishing funds and give fund managers some juicy tax breaks when they’re up and running. It’s now possible to open a fund in just weeks. In September, the MAS removed certain resident, registration and investment restrictions that should widen tax benefits and boost attractiveness. As of last year, both local- and foreign-currency denominated funds can be traded on the Singapore Stock Exchange, although none have listed yet.The results are impressive by any standard. Singapore’s hedge fund assets under management pretty much doubled from 2005 to 2006 and stood at $14.7 billion, according to estimates by Eurekahedge. The Singapore-based research group estimates the first nine months of the year added a further $9.4 billion. A total of 144 hedge funds are now registered in Singapore and include both locally grown funds and offshore outposts.Melvyn Teo, a finance professor and director of the BNP Paribas Hedge Fund Centre at Singapore Management University, predicts Singapore hedge fund assets can grow by 30 percent for years to come. “Business has picked up quickly,” says Arnold Tan, a partner at Singapore law firm Rajah & Tann.Singapore faces some stiff competition, however. While the gap is narrowing, Hong Kong remains Asia’s biggest center for alternative investments; Eurekahedge estimates Hong Kong’s hedge fund total stood at $32.6 billion at the end of September. Hong Kong retains its dominance as the gateway of choice for China. Because it had a years-long head start over Singapore, Hong Kong has developed a more sophisticated array of hedge fund offerings, says Effie Vasilopoulos, a Hong Kong-based partner at Sidley Austin LLP. Hong Kong’s Securities and Futures Commission recently moved to reduce the time hedge funds need to gain approval and eased residency requirements. The Hong Kong government has promised it will cut corporate tax rates as well. Hong Kong and Singapore have created a competition for investment management that rivals anything in the world today.The results? “Both markets grew dramatically in the last five years,” says Vasilopoulos. “In reality, both are strong.”At the heart of this boom is one overriding trend. Both wings of the alternative asset world, hedge funds and private equity shops, whether homegrown, U.S. or European, view the Asia-Pacific region as ripe for opportunity on its own behalf and a necessary part of any investment mix. As a result, funds are piling into Asia.Allocations are ratcheting up for those already in the region and becoming more country-specific. Where once investment allocations were no more specific than “Asian,” there now are separate baskets for China, for India, for Southeast Asia.There’s a long way to go. Asia-Pacific probably accounts for less than 10 percent of all alternative assets investments. While percentage increases are impressive, “these are still very, very small players on a global scale,” says Nick Humphrey, a Sydney-based partner at law firm Deacons and the head of the Australasia private equity practice. Compared with the U.S. and Europe, “it’s a very junior industry.”It’s also been an easy ride so far. Booming equities markets from India to China provide abundant opportunity for outsized gains. There’s also ample evidence that these equities markets are overheated, although some of the more sober analysts believe it will take some time before the bubble bursts. Any correction may well force some smaller players out of business.But barring another 1997-style regional meltdown, no one expects a letup in alternative investments. “Money is washing through the region,” says Humphrey. “Singapore will benefit, Australia will benefit, Hong Kong, India, Malaysia, the Philippines will benefit.”Singapore’s alternative investment scene highlights both the attraction of capital to the region and also the changing nature of investments. Not only are various stock markets booming, government-owned assets such as power generation are being privatized as well in many Asian countries. With generational changes, even the largest family companies are ceding control.All that brings private equity shops calling.In the case of Singapore, two government investment giants, Temasek Holdings Pte. Ltd. and the Government of Singapore Investment Corp. Pte. Ltd., are major global players in their own right. Each manages more than $100 billion. Temasek operates as a big-time private equity shop in the region. Its Fullerton Fund Management Co. Ltd. subsidiary manages both hedge funds and hedge funds-of-funds. The GIC, which manages the government’s foreign reserves, invests as well in private equity and other alternative investments. Both can easily jump-start a fund or fund-of-funds.Singapore’s recent tax breaks are especially noteworthy. Both management fees and carry are now taxed at a straight 10 percent, instead of the usual 18 percent corporate tax rate (which was lowered from 20 percent earlier this year and is still low by international standards). A fund now can be registered and resident in Singapore and still gain tax exemption on just about any investment, save local real estate and locally made loans, according to David Sandison, a Singapore-based tax partner with PricewaterhouseCoopers. In addition, under the new regulations, most investors don’t have to pay tax on dividends.In February, the government dropped its so-called 80-20 rule, a two-year-old regime that said 80 percent of funds must come from offshore investors in order for fund managers to take advantage of tax exemptions. The MAS released details in September that offered the most liberal interpretation imaginable. A single foreign investor qualifies the fund for exemption.Hedge funds may seem like an odd industry for a government to push. The logic for Singapore goes something like this: Attracting hedge fund managers helps build the financial services industry in a fashion the country wants. Singapore conceives of itself as “the Switzerland of Asia” and believes financial services represent the ideal highly skilled, highly paying jobs for its young populace. In recent years, the country has seized on private banking and wealth management as a way to foster this ambition and has, in fact, had some success, especially in capturing both Mideast and Indian money.To attract this wealth, the thinking goes, Singapore must offer more than the usual promises of secrecy, discretion and low — or no — taxation. Servicing the wealthy with sophisticated investment alternatives such as hedge funds is a critical component in that drive. In turn, capturing that wealth in itself helps underwrite alternative assets vehicles. “In wealth management, we must build on our existing base of asset managers as well as broaden our scope of activities to include alternative assets,” Lee Hsien Loong, then chairman of the MAS, said in October 2002. He cited hedge funds and private equity as “areas of development.” Lee is now prime minister.Moreover, the hedge-fund presence attracts other aspects of financial services, such as prime brokerages, back-office services and independent administrators. It’s really a variation on the build-it-and-they-will-come theory.To a government that for decades has believed in social and economic engineering, putting the right incentives in place for any goal is considered business as usual. “Singapore wants to oust Hong Kong as the center for hedge funds, private equity and private banking,” says one Hong Kong-based investment manager. “It will do anything to get those industries moving.”Singapore’s alternative investment management has been far from an overnight success, however. The MAS first enacted its hedge fund regulations in 1996.As late as 2002, hedge fund assets under management totaled a paltry $500 million, according to Eurekahedge estimates. The funds themselves tended to be minuscule. “Five years ago, $100 million was considered big,” says Phillip Crowley, a Singapore-based partner at Deacons.Times have changed. In May, for example, a former Goldman, Sachs & Co. executive launched a $1 billion fund called Broad Peak Investment Advisers. Both Arisaig Partners (Asia) Pte. Ltd., formed in 1996, and Artradis Fund Management, founded five years later, now manage more than $2 billion in funds and are probably Singapore’s two largest.”Singapore has developed exponentially in the last couple years,” Vasilopoulos says.Singapore started the contest for hedge fund managers with a distinct disadvantage: location. As hedge funds and private equity broke out of the North America-Western Europe axis and began to find their way to Asia a decade back, fund manager headquarters appeared to divide along geographic lines. So Japan-oriented funds were based in Japan, Australian funds in Australia and China-directed funds in Hong Kong. Singapore constituted a much smaller base, basically itself and the other Southeast Asian countries, with their relatively tiny equities markets. Largely centered in Southeast Asia, the Asian financial crisis of 1997 and 1998 didn’t help matters.The demarcation lines are no longer so obvious. (Australia may be the exception to this, but that’s another story.) “It’s a lot more complicated,” says Khiem Do, who heads Baring Asset Management’s Asian investment team and runs portfolios out of a Hong Kong office.Those who concentrate on China still tend to settle in Hong Kong. Those whose main interest is in Southeast Asia head for Singapore.For everyone else, it’s as much personal choice as anything else. Do half-jokingly suggests the real division may be between single or child-less managers who prefer Hong Kong, with its quick pace and hyperactive nightlife, and those with families who prefer Singapore, which offers far better housing, more affordable schools and much cleaner air. “You can breathe,” says one Singapore-based manager.Arisaig is an example of a Singapore-based fund that has spread its wings geographically. Its first offering was an Asean fund, named after the 10-country Association of Southeast Asian Nations. But then Arisaig added an India fund, a Greater China fund, a Korea fund and, in February, a Central Asia fund. Singapore is attracting a surprisingly high number of Japan-related funds, according to a study the BNP Paribas Hedge Fund Centre published recently. And the country, which has a significant Indian populace to begin with and has easy air connections to several Indian cities, has emerged as probably the biggest center for India-related funds. Both Japanese and Indian funds suffer high taxes if based in their home countries.Singapore has other factors going for it as well. It is efficient. Its corruption level is extremely low. Its legal system is well developed. It has for years been one of the world’s largest foreign exchange centers.With the jump in the number and level of funds, ancillary services have, indeed, followed. According to a HedgeFund Intelligence Ltd. survey, there are about 10 independent administrators in Singapore. Pretty much all of the major international prime brokers have Singapore operations as well. Singapore now serves as prime broking regional headquarters for Credit Suisse Group, Citigroup Inc. and Barclays Capital plc, according to HedgeFund Intelligence. “Singapore is a very convenient place to do business and to set up a hedge fund,” says Samir Arora, who heads Helios Capital Management Pte. Ltd., Singapore’s most prominent India-�related equity fund. In an e-mail exchange, Arora ticks off the advantages: “Very good quality of life/ease of starting/very close to India/a large Indian community/low taxes. Take your pick.”Even for China-oriented funds, it is no longer as clear-cut as it once was. Singapore is “becoming increasingly attractive as a base for incursions into China,” Sandison says. He lists Singapore tax reforms as well as a double taxation treaty with China as reasons why. “The division is indeed blurring.”How much so remains to be seen. Conventional wisdom still dictates a Hong Kong base for China-related funds. “I have at least one conversation a day with managers who want to set up a fund,” says Vasilopoulos. “There are two variables. One: Do they need to be in a particular market? Two: What their strategy is about. If it’s Greater China, they still base themselves here.” What’s more, Hong Kong hedge funds have grown by complexity of offerings, including hedge-private equity hybrids, special situation funds and derivatives. “There are very sophisticated strategies here; they rival the most sophisticated strategies in the U.S.,” Vasilopoulos says.Singapore now has a few collateralized debt obligation- and collateralized loan obligation-related funds, according to Tan. But it remains largely grounded in the more traditional offerings — long/short, global, country and macro.The Hong Kong hedge fund industry feels the heat from Singapore and has lobbied hard for concessions. The government responded.In October, the Securities and Futures Commission eased restrictions that had limited foreign investment managers in local funds. That followed a string of reforms over the past year that included an abolition of taxes on offshore funds’ profits and a streamlined license procedure. Singapore still has an edge, however. “The Monetary Authority of Singapore is super-responsive in dealing with startup issues,” says Arora.A fund manager coming to Singapore from the outside can set up shop in about six weeks and raise a fund in three months. Hong Kong, by contrast, in the past could take six months just for the license to do business, although new regulations should significantly speed up the process, Hong Kong-based advisers believe.While Hong Kong’s 17.5 percent corporate tax rate is marginally better than Singapore’s 18 percent, the 10 percent concession tax Singapore offers on management fees is a decided advantage, especially now that the rules have been clarified. “It has been very effective,” says Tan, who has been advising hedge funds in Singapore since 1996.Private equity is a slightly different story. This isn’t a question of attracting private wealth into Singapore as much as using the country as a base to do deals in the region. In this, Singapore lags well behind Hong Kong. According to Eurekahedge estimates, total private equity assets in Hong Kong stand at $62 billion, with Singapore at $24 billion.Hong Kong has attracted more of the giants. TPG (or its affiliates) has been in Hong Kong for a decade. Kohlberg Kravis Roberts & Co. opened its office there in 2005. In January, Blackstone Group LP chose Hong Kong for its first office in East Asia. On the other hand, “there’s absolutely no reason why a firm shouldn’t set up here,” says Singapore-based Chris Rowlands, the managing partner for Asia for publicly traded private equity group 3i Group plc. “We’ve been here for 10 years.According to Rowlands, 3i has invested in four Singapore-based oil and gas-related companies. One of them, Pearl Energy Pte. Ltd., was floated on the Stock Exchange of Singapore in 2005, a year after 3i made its $15 million investment. One year later, Dubai’s Aabar Petroleum Investments Co. PJSC paid $534 million to take it private.Singapore itself, has witnessed some fairly dramatic private equity deals, although what the global credit crunch means for future deals isn’t clear. Colony Capital LLC of Los Angeles bought Raffles Holdings Ltd., owner of the landmark Raffles Hotel, for $1 billion in 2005. Late last year, 3i led a group that invested $620 million in a new Singapore reinsurance venture called Asia Capital Reinsurance Group Pte. Ltd. Last month, TPG and Affinity Equity Partners completed their $1.4 billion buyout of United Test and Assembly Center Ltd.Singapore’s Southeast Asian neighbors are also dangling some potentially major deals. Next month, the Philippines is scheduled to auction a 25-year concession to run the country’s power grid, although previous attempts were derailed and such projects are inevitably delayed by political wrangling and legal maneuvering. According to several media reports, a subsidiary of TPG Capital will join with Philippine food and beverage giant San Miguel Corp. and Malaysian power supplier Tenaga Nasional Bhd. to bid on what has been valued in the past as a $3 billion asset. TPG declined to comment.

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