The Outlook of Singapore’s Alternative Investment

Global financial markets have continued to worsen as the coronavirus pandemic is still very much prevalent across the world.  With global stocks, bond and cash equivalents having their worst performance in the first quarterly start to a year, it is no surprise that the conventional investment has slowly fallen out of the favour among investors, steering them into the arms of alternative investment amid the financial crisis.  This is especially so in Singapore as its strongest stocks, Straits Times Index (STI) has tumbled more than 24.3% since the 1st April 2020.

An alternative investment is a financial asset that does not fall into the core investments categories of stock, bonds and cash. While the list of alternative investments is extensive, some of the more common examples in Singapore include private equity or venture capital, hedge funds, art and antiques, commodities, derivatives contracts and real estate.

A key reason why alternative investment is attractive to investors, especially during an economic fallout, is the diversification of revenue streams compared to conventional investment. Alternative investment can also reduce investors’ portfolio volatility, offering them better long-term risk-adjusted returns. Moreover, money generated through alternative investments could potentially be subjected to more favourable tax treatment than conventional investment. However, the environment for alternative investments activities varies from countries to countries. Here are some reasons why it is worth obtaining Singapore’s alternative investment license.

Figure 1: Why Alternative Investment in Singapore

Interest To Protect The Financial Sectors

Given the nature of complexity and the lack of transparency, it is common for illicit handlings to be manifested in alternative investments, such as the Real Estate Investment Trusts (REIT), commodities and oil partnerships. This has thus exposed alternative investments assets to some degree of risk.

With this in mind, Singapore has thus joined the US and European Union in the enacted ordinances to fortify its fund management sector. Since 2010, the Monetary Authority of Singapore (MAS) has instituted strict measures to regulate alternative investment licensing, especially the qualification of fund management companies (FMCs) in Singapore.

By further reinforcing guidelines applied in major financial districts across the world, MAS regulations on the people conducting fund management in Singapore will help to prevent furtive transactions from gaining traction in the investment activities. Though this may limit the flexibility of FMCs, it is no denial that the regulations provide a rather safer and protected financial environment that is uniquely Singapore for investors. As such, Singapore is believed to be a suitable investment hotspot for its interest in creating a secure financial investment environment amid this current financial storm.

A Sustainable Investment Landscape

Besides that, as stated in MAS’s aim to regulate fund management industry, the sustainability of Singapore’s investment vehicles, wherein private equity and hedge funds hold a sizable portion of its portfolio, is the priority among the development of the city-state’s economy.

As an emerging assets class in Singapore, there are plenty of blank spaces in the investment sector waiting for investors to fill in. This has allowed investors more opportunities to explore various income streams that perform independently from traditional markets. Also, it provides the possibility of cross border cooperation between the financial sector and organisations in other sectors. One such example is the United Sustainable Credit Income Fund (USCIF) launched by UOB Asset Management Ltd (UOBAM) back in March. The first bond fund in Singapore for retail investors focuses on bonds from companies that are making progress against the United Nations (UN) Sustainable Development Goals (SDGs), promoting a sustainable economic, social and environmental development.

The freedom in exploration has unknowingly created a sustainable investment landscape where investors in Singapore will be able to enjoy a wide range of income sources while ensuring their portfolio is not overly exposed to market risks.

In addition to the regulations on alternative investment licensing, Singapore’s authorities have also enforced measures in regards to the risk management framework. According to MAS, every licensed and registered FMCs in Singapore will need to establish a formalised risk management framework. Such rules will ensure proper investment conduct and the sustainability of both FMCs and Singapore’s financial sectors as risk management is the key factor in attaining sustainable financial environment.

As such, the flexibility and diversity of alternative investment choices, coupled with the risk management regulatory framework, has made Singapore more sought after as a sustainable investment destination for managing funds even after the current financial crisis.

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Qualifying Conditions for Managing Singapore’s Alternative Investment Fund

The outlook of alternative investment in Singapore seems to be promising during the financial crisis as proven by the benefits highlighted above. However, investors will need to fulfil certain regulations to be qualified for managing alternative investment funds in Singapore. These conditions are as follow:

Figure 2: Qualifying Conditions for Managing Alternative Investment Fund

Capital Markets Service (CMS) Licensing

According to regulations enforced by MAS,  any individuals or business entities who are managing funds in Singapore are required to have a Capital Markets Services (CMS) license regardless of their financial status.

However, FMCs can be exempted from the acquisition of a CMS license if they handle not more than 30 qualified investments in which the accredited investors have a net asset exceeding ten million Singapore dollars. Besides that, FMCs not only require to meet the proposed conditions under the Securities and Futures Act of Singapore (SFA), their skills and expertise are also needed to be aligned with the managed funds to be exempted from acquiring a CMS license.

Moreover, to better regulate the alternative investment activities in Singapore, MAS has categorised all FMC into three different bands using the Assets Under Management (AUM) of S$250 million as a benchmark. If the AUM of an FMC, including the exempt FMC, is under S$250 million, it will be under the Registered FMC band.  If the worth of the assets goes beyond S$250 million, FMCs will be under the Accredited/Institutional FMC or the Licensed Retail FMC category.  The former serves only accredited and institutional investors, while the latter serves all types of investors, mainly retail investors.

Local Talents

To better protect the interest of Singapore’s local talent, MAS has also enforced certain conditions on manpower. According to the regulations, FMCs under the Registered FMC and the Accredited/Institutional FMC categories will need to employ at least two full-time local directors with at least five years’ relevant experience in the financial services sector. As for FMC under the Licensed Retail FMC, it is required to hire three full-time local directors with at least ten years of relevant experience. However, FMC who is exempted from the hold of a CMS is not required to follow these staffing requirements.

Client Assets

Besides focusing on the directives for managers and consultants of the investments, MAS has also taken the time to clarify what laws control the funds itself. According to the regulatory framework, clients’ money and assets managed under an FMC will have to be placed under a custodian. This means that FMCs will have to appoint a third party entity to manage the funds as well as any interest conflicts occurring between clients and the FMC.

Obtain Your Alternative Investment License Now

The current dire situation in global markets calls for a change in investment opportunities and direction.  However, while alternative investments in Singapore can be attractive for its stability and sustainability, there are also many underlying societal, political and economic risks in regards to managing alternative funds, just like traditional investments. Moreover, the process of obtaining alternative investment licensing can also be complex and tricky as it contains many unpredictable factors that vary from country to country. Thus, investors need to be thoroughly educated on the background, the rules and regulations of the countries that they are opting to set up investment funds, which in this case is Singapore.

To understand more about the benefits of the alternative investment in Singapore and how your company can better acquire Singapore’s alternative investment license, it is best to engage business consultancy experts like Desfran. Spearheaded by one of the world’s leading management teams, our team of seasoned experts stay on top of trends and movements in various investment markets to help your business grow by providing comprehensive alternative investing solutions. Contact Desfran today to explore the best alternative investment solutions that will stimulate your business. 

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References

Hedge Fund Manager Regulation: Singapore to Catch Up with Hong Kong, Eeurekahedge.com

Private Equity in Singapore, Law.nus.edu.sg [PDF]

Singapore: Alternative Investment Funds 2019, Iclg.com

COVID-19’s Impact On The STI: How Singapore’s Strongest Stocks Are Faring – And Should You Invest Now?, Dollarsandsense.sg

A spotlight on alternative investments, Fidelity.com.sg

Alternative Investments for Beginners, Thebalance.com

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