For hedge funds, Singapore is a mecca

Date: Friday, December 7, 2007
Author: Tomoko Yamazaki Bloomberg News

TOKYO: Akira Sunaga runs a Japanese hedge fund and displays the rising sun of his country's flag on company name cards. Yet his office is in Singapore.

Sunaga chose the island state, 3,294 miles, or 5,300 kilometers, from Tokyo, as the best place to set up his fund a decade ago, because Japanese taxes were four times more and Singapore had a quicker approval process.

Just three funds registered with the Investment Trusts Association in Japan last year, while Singapore welcomed 78 new hedge funds, data compiled by the Japanese trade group and Monetary Authority of Singapore show.

"From both a tax and regulatory stance, Singapore was the best pick," said Sunaga, who considered Hong Kong and Australia for a fund that has grown to ¥50 billion, or $450 million.

Sunaga has not been persuaded to go home, even after the Japanese government eased application procedures and said it might allow stock exchanges to increase trading of futures and commodities.

Tokyo, seeking a greater share of the $1.8 trillion pool of hedge fund assets, trailed cities including Singapore, Zurich and Chicago to rank as the ninth most-attractive financial hub in a March study by the City of London.

"The fact of the matter is, Japan is far from being the financial center of Asia," said Atsushi Saito, the Tokyo Stock Exchange president, last month. "We've been trying very hard to attract hedge funds to Japan, to make them comfortable, by asking for tax breaks, but there is only so much the exchange can do alone."

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets rise or fall.

Singapore has lured hedge funds by exempting money management companies with fewer than 30 institutional clients from most regulations, said Peter Douglas, the president of GFIA, a firm based in Singapore that provides research and allocates capital to Asian and Latin American hedge funds.

"That's become very positive for the hedge fund world because it means that your regulatory overhead for a new small business is virtually nil," said Douglas, who is also the chairman of the Singapore chapter of the Alternative Investment Management Association.

It took Sunaga just two weeks to get a license from the Monetary Authority of Singapore to operate as an investment manager and his NDC Arbitrage Fund started in two months.

Sunaga said he made the right decision to move to Singapore. He has obtained residency and increased his business to offer online foreign-exchange trading and real estate investment trusts.

Rheos Capital Works waited for six months to get approval from the Financial Services Agency in Japan to manage its own funds, said Hideto Fujino, the chief executive officer of the hedge fund, which has about ¥30 billion in assets. Rheos got the license in September.

"Tokyo has ingredients to become a financial center but is doing very little to do so," said Jesper Koll, the president of Tantallon Research Japan, a company that provides research for hedge funds. "Japan is missing out on a huge opportunity."

Japan implemented the Financial Instruments and Exchange Law on Sept. 30 to offer investors greater protection. Under the new rules, hedge fund managers who wish to start their own businesses are no longer required to win approval from the Financial Services Agency, though they still have to register with the regulator.

The requirements are aimed at making sure a fund management company has enough staff to operate, said Takashi Kanda, a deputy manager at the regulator's Supervisory Bureau Securities Business Division.

Hedge funds typically start with two or three people as they raise funds and generate returns. Japanese regulations require firms to have "sufficient" staff, without specifying a number.

Rheos had to hire 11 additional personnel, including a compliance officer, this year to qualify for the license. That compares with Sunaga's NDC, which started with three people, including Sunaga, and now has seven people.

Taxes are another reason hedge funds shun Japan, said Yukinori Machida, an attorney-at-law in the Tokyo office of Pillsbury Winthrop Shaw Pittman, which has hedge fund clients.

Anyone who has a "permanent establishment" in the nation may be subject to a corporate tax rate of at least 41 percent.

The corporate tax rate in Singapore is about 17 percent and tax incentives may reduce that to about 10 percent, said Chua Soon Hock, who started a Japan-focused fund in Singapore in 1999 and helps oversee about $540 million as managing director of Asia Genesis Asset Management.

In a bid to attract more business, the Financial Services Agency is asking the government to exempt overseas investors in funds that trade Japanese securities from the permanent establishment rule.

"Some people say 'the brain lives in Tokyo and the body lives in Singapore,' " said Christopher Wells, a partner in the Tokyo office of White & Case, which has hedge fund clients. "There has been a huge brain drain out of Japan."