New fund arrangements have been established in the two cities in an effort to draw money away from established foreign financial centers.
The epidemic in 2020 prevented movement and closed boundaries. However, two of Asia’s largest financial centers simultaneously recognized a chance to change the global center of gravity for hedge funds and the richest families in the world.
The “variable capital company,” a fund structure created by Singapore, enables a broad variety of prospective users to conceal sizable capital amounts in covert, minimally taxable vehicles based in a well-managed financial center. The “open-ended fund company,” a comparable framework that Hong Kong had created two years earlier, was improved.
The vehicles pose a direct threat to already-established foreign financial centers like the British Virgin Islands, Mauritius, and the Cayman Islands, and their proponents believe they could signal significant shifts in how money is handled.
According to a Singapore-based associate of a UK law company engaged in establishing the new arrangements in both cities, “We see this as the beginning of a massive shake-up of asset management, of family offices, and the entire flow of capital.” The foundation has been laid for [HK and Singapore] to serve as the hub of a new blend between family offices and hedge funds as a result of this.
The number of investors has increased quickly, especially in Singapore. They could have a much wider and more damaging effect than previously thought, according to the financiers, fund managers, and attorneys engaged in putting them up, bringing resources and experience to the area. They view the advances as precisely the kind of regulation audacity Asia requires today.
According to Bayfront Law attorney Ryan Lin, “Singapore has always been the poorer cousin compared with the Cayman Islands, British Virgin Islands, and even places like Mauritius.” He calls the new arrangement “a game changer.”
“[The VCC] arrived as Singapore’s reputation as a center for wealth and money administration grew…It came at the perfect moment.
The new cars pose a direct threat to established foreign financial centers, whose economies heavily rely on the income from financial services and whose success has been based on secrecy and cheap taxation.
Others worry that they’ll encourage tax evasion and money trafficking. The danger with cars like OFCs and VCCs, according to Mara Martini, a research and policy specialist at the advocacy organization Transparency International, is that they “usually function like a black box” and “can be very attractive to the corrupt and other criminals.”
returning it home
Following the Panama Papers and Paradise Papers disclosures, which in 2016 and 2017 prompted hundreds of news reports globally about the use and misuse of foreign assets in the Caribbean, Hong Kong saw its chance.
Some organizations, particularly public pension funds, became more wary of the social risks associated with participating in private equity and hedge funds based in locations like the British Virgin Islands and Cayman Islands as a result of the tales. According to a financial advisor located in Hong Kong, investors were searching for options because the general public had begun to “think that people only put money into the Caymans to hide something.”
The OFC, a replacement for it that intended to “enrich the choice of investment vehicles and facilitate the distribution of Hong Kong funds internationally,” was launched by the territory’s authorities in 2018.
Corporate investment vehicles known as OFCs with a Hong Kong home allow their units to be sold to the general public or kept personally. An organization with a Hong Kong asset manager certificate must be in charge of managing the assets contained therein.
The advisor, who has experience with OFCs, claimed that the region “was trying to capitalise on this trend” in order to draw in rich business and enhance its standing as a major financial center.
The competitor VCC was introduced in 2020 by Singaporean officials who were fed up with local fund managers’ propensity to establish investment entities abroad rather than in Singapore. As long as they had a local organization to oversee it, the city-state made it simpler for domestic and foreign organizations to establish an investment vehicle in Singapore.
Despite the term “variable,” VCCs can also have set capital, which enables them to serve a wide variety of prospective customers, including administrators of family wealth, hedge funds, real estate companies, and mutual fund organizations.
A collection of assets and numerous sub-funds can be held by a single locally organized organization, which lowers costs. Additionally, it is protected from double taxation by more than 70 deals, decreasing the likelihood that the assets contained within it will be charged twice.
One attorney involved in the creation of the vehicles claims that one “big differentiator” between VCCs and conventional structures is the ease with which stockholders can receive income payments. “In a conventional entity, the regulators will be all over you if you start paying dividends out of capital rather than out of profits.”
The fact that stockholders’ identities are kept private is another, possibly even more appealing, attraction in both Hong Kong and Singapore. The attorney continues, “That’s crucial because if I were a shareholder and had funds in several VCCs, I wouldn’t want people to know where I’d invested.”
Operating expenses are fairly low, according to Matthias Feldmann, a senior investment management associate at Clifford Chance with offices in Hong Kong and Singapore. “Once established, a VCC is less costly to run than a foreign investment vehicle…That is one of the main sources of income for the administration.
The risks in geopolitics
There were very specific reasons for creating the cars for both banking centers, which have been fierce competitors in Asia for a long time.
According to Sally Wong, chief executive of the Hong Kong Investment Funds Association, Hong Kong had a clear target market in mainland Chinese investors and organizations, some of whom are attracted to the territory for its “familiarity and proximity.”
OFCs can also make use of so-called link programs, which let buyers from the mainland and Hong Kong purchase asset management and exchange-traded fund goods on each other’s marketplaces.
Singapore’s goal was more quietly aggressive: to completely discard its image for being sleepy and to place itself as the new apex aggressor in the region through regulation innovation and social risk-taking.
A indication of how effectively Singapore has been able to place itself as the “not China” choice for both Chinese money — whether kept inside or outside the People’s Republic — and other currency is the city-state’s quicker uptake of VCCs, according to attorneys. As ties between the US and China have gotten worse, its reputation as a secure refuge has grown.
To encourage the register of new cars, Hong Kong and Singapore both introduced substantial rewards, solidifying in the thoughts of buyers the notion that it is now official government policy to promote their spread.
The government is dedicated to making Hong Kong a center for fund residency as well as fund dispersal. This car [OFC] is a component of that set. It’s a tactical goal, explains Wong.
Hong Kong adjusted the OFC’s framework to make it more similar to its competitor in south-east Asia in reaction to the introduction of VCCs and their quick early uptake. The government would pay 70% of all costs to attorneys, CPAs, and other expert advisors hired to create OFC frameworks up to a valuation of HK$1mn (US$128,000), according to a 2021 Securities and Futures Commission announcement.
Although Singapore’s grant of S$30,000 (US$23,000) is more substantial, top managers and fund proprietors are also given work permits in the Lion City.
The administrators of more than a dozen funds claim to have recently finished or were currently in the process of creating an OFC in Hong Kong.
One fund manager who established an OFC in January claims, “It’s not that we have a fixed idea yet of what might be coming under this umbrella.” We simply want to be prepared to respond “yes” if, for example, a Chinese billionaire contacts us and requests funding for a building of this nature.
Although there were 40 OFCs established in 2021 and 64 in 2022—an increase from the eight recorded in the first two years—Hong Kong still trails behind its competitor. These figures are much lower than those of Singapore.
The extended shade projected by an increasingly authoritarian China is one factor in this. Privately, experts providing advice on the structure in Hong Kong claim that one factor restricting the scheme’s uptake is the fact that many Chinese investors prefer to engage in Singapore, which they see as being further away from Beijing.
One advisor adds, “That’s the issue we [Hong Kong] face: It’s not seen as being truly offshore.”
The hurry to build the new buildings has been particularly noticeable in Singapore. The bulk of Singaporean managers had their money in foreign countries like the Cayman Islands, Mauritius, or Luxembourg prior to 2020. The situation has changed, according to Mahip Gupta, a director at Singapore’s Dhruva Advisors.
Since the introduction of the variable capital company structure, the majority of investors have selected Singapore as their fund domicile center. Dhruva has established 65 VCCs, of which about a third moved from other countries, and even new fund manager applications have considerably increased here, according to Gupta. He continues, “A massive onshoring of funds is taking hold.”
According to official statistics, there were 872 VCCs listed in the city-state as of February. According to the most current statistics from the Monetary Authority of Singapore, the island nation’s central bank and financial supervisor, that contributed to a record S$448 billion in total asset management imports during 2021, which were 15.7% higher than the prior year.
According to the most current statistics accessible, there were 1,108 approved and listed money management firms in Singapore as of 2021, a rise of 146 or 15% year over year.
One hedge fund boss claims that “even the MAS was surprised by the pace of growth.” To satisfy the demand, more employees were needed.
On precisely who is using the cars, experts differ. “The VCC is not yet that common for large international managers or for institutional managers targeting international investors,” says Feldmann.
The benefits provided by both centers, according to a hedge fund executive whose company has used the frameworks, do little to draw major blue-chip investors. “These little handouts don’t matter to the large people…They consider it to be nothing.
VCCs, however, have advanced significantly since their introduction in 2020, according to Anne Yeo, director of funds and financial management at Rajah & Tann. “Over the past 12 months, we have noticed a steady change in the amount of money that foreign buyers from all over the globe are investing in the VCC.
“From what I can tell, VCCs complement Cayman or other fund structures,” she adds. “Our universe is complicated. There isn’t a unique money framework that is only based in one country.
attractive family riches
The quick development of family offices, another branch of Singapore’s asset management sector, has also benefited VCCs there. During the epidemic, substantial sums of family wealth, particularly from mainland China, migrated to the city-state, surpassing perhaps even VCCs in terms of development.
Single family offices are not subject to regulation by the MAS in Singapore because they do not handle third-party assets, and according to attorneys, they have been expanding into the VCC market. The result is the development of an ecology that attracts funding from other areas of the globe.
“The region where family riches and VCCs coexist…is the point at which single family offices determine they want to accept outside capital and begin using a VCC structure, according to Vikna Rajah, an associate at Rajah & Tann who specializes in tax and trust for private customers. He continues that although the action necessitates that they become licensed fund administrators, it is causing a surge in numbers.
The new structures’ allure as well as the anticipated inflow of money into them are starting to spark a movement of financial knowledge. Singapore mandates that VCCs have a fund manager located in the city-state who is in charge of due investigation and anti-money laundering measures. The CEO of the hedge fund comments, “That’s very smart.” It will generate a large number of employment for attorneys, accountants, and inspectors.
Family offices or businesses associated with the newly formed structures have reported a steady recent exodus of both novice and seasoned employees in Singapore and Hong Kong’s investment banks and long-only pension funds in anticipation of a deluge of new capital.
According to attorneys, the VCC and OFC structures on the surface resemble weaponry in a conflict between Hong Kong and Singapore for the title of premier Asian financial center due to their structural resemblance. They contend that in fact, the goal is to create the two centers as a new and better overseas location, which is a much larger offer to global funds.
However, both Hong Kong and Singapore are approaching risky terrain by placing themselves as competitors to hubs like the Cayman Islands. They are attempting to entice the most profitable portions of the Caribbean countries’ rich business while avoiding the negative publicity they have already encountered for helping with tax evasion.
The two towns must also avoid luring money from prohibited organizations, money launderers, and other individuals who might be attracted by the absence of transparency regarding the owners of the funds.
Martini from Transparency International says that legitimate money “could be mixed with dirty money and used to invest across different sectors.” This may make “tracing possibly misappropriated money challenging for officials…Transparency and control of fund administrators are essential to reducing the dangers that these arrangements will be used for money laundering.
Both regions claim to have implemented such steps. King Au, executive head of the consultative organization established by the Hong Kong government, the Financial Services Development Council, admits that buyers in OFCs may come from the US, Europe, and perhaps even Russia.
Accordingly, “the fund managers or the banks who distribute the products [have to] screen out these unwanted clients or money [through] the regulatory obligations,” he adds.
Executives at the organizations in Singapore and Hong Kong that manage the assets are responsible for carrying out this job. One of them claims that “reams” of documentation and due diligence checks have been necessary, while another warns that he may at any moment be subject to spot checks by regulators and held accountable for any misconduct.
The hedge fund CEO speculates that some businesses may be “willing to take a risk” more than others or may be better at vetting their clients. He does, however, concur that it is “the right thing” to transport the money home.
“To me, the key is that they’re attempting to establish it as a legitimate jurisdiction right away.”