Small funds gear up for tighter rules

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Exempt Fund Managers would face tougher rules and higher expenses.

Business Times - 16 Jan 2012

Small funds gear up for tighter rules


Implementing a risk management framework deemed main concern

By EMILYN YAP

(SINGAPORE) Boutique fund managers are bracing themselves for higher costs and other challenges as regulators look set to bring in new rules tightening supervision of the industry.

Some have hired experienced help to meet competency requirements; others are mulling over the risk controls to set up. 'I spend about 65 per cent of my time worrying about these rules,' said Boswell Capital Management director Tom Boswell.

The changes would increase regulation of an industry shaken by swindler Bernie Madoff's Ponzi scheme, and bring rules for fund managers in Singapore closer to those in other markets. But they would also create additional costs for the sector, with smaller funds bearing a proportionately larger strain.

The fund management industry got its first look at the potential changes when the Monetary Authority of Singapore (MAS) put them up for consultation in April 2010. More proposals followed last September.

The new regime would raise the bar for exempt fund managers (EFMs) which serve no more than 30 qualified investors, and have so far been excluded from many rules governing licensed funds.

For instance, EFMs would have to employ at least two full-time individuals living here who both have at least five years of relevant experience, and appoint a custodian for clients' monies.

An independent auditor would assess the fund management firms every year, checking among various things if they have a framework to identify, monitor and manage risks.

EFMs with assets under management (AUM) of $250 million or less would be renamed registered fund management companies, and MAS would maintain an online directory of them.

The regulations could kick in early this year. Though MAS has not released the final version, industry watchers expect few amendments to the drafts.

'The new requirements of MAS are probably just an annoyance for a hedge fund with an AUM of $250 million, but they will make the environment very unwelcoming for small hedge funds,' said a hedge fund manager with under $15 million in AUM.

A poll which Ernst & Young conducted last year among 44 fund managers - most of whom were EFMs - reflected some of the worries. For 54 per cent of the respondents, the implementation of a risk management framework emerged as the main concern.

Fund managers BT spoke to - most of whom asked not to be named - were unsure about what an effective framework should look like. The MAS consultation paper said it should take into account MAS guidelines on risk management practices and other industry best practices, but there were no details.

'As the risk management framework requirement is new to the industry, many players are seeking advice,' said Ernst & Young partner for financial services Brian Thung. There is no one-size-fits-all solution, and fund management firms will have to come up with a system matching their size, scale and risk profile, he said.

That the risk management framework would be one of the things under auditors' review is another source of uncertainty. Given the industry's diversity, it would be difficult to define what a model framework is, and an auditor with little experience may be unable to judge, said the hedge fund manager.

The annual audit itself would layer on extra expenses. There is no standard audit fee since it varies with the work's complexity, but market estimates go up to tens of thousands of dollars. 'MAS officers should do the audits, like how they inspect the banks,' said an investment manager. 'This would also give MAS a better insight into the workings of the industry.'

For one-man operations, the largest cost would come from hiring another skilled person. Industry players reckon that someone with five years of relevant experience could command an annual wage of around $100,000.

Some fund managers have hired ahead of schedule in anticipation of the rule. For Mr Boswell, the search continues. It is tough finding someone with the right personality to work closely with, who also has a similar approach to investing and taking risks, he said. 'It's like forcing someone to get married.'

The new rules could mean fewer start-ups, casting doubts over the vibrancy of the industry ahead. Small players have had a considerable presence. According to hedge fund tracker Eurekahedge, some 26 per cent of the 193 hedge funds in Singapore in 2010 had an AUM of under $20 million.

Market watchers believe that new entrants would need an AUM of $10-15 million to break even in future, compared with around $5 million now.

An investment firm founder suggested that MAS help start-ups by exempting them from the rules until they reach a certain size. They could be grouped into a new category, below the tier for registered fund management firms, he said.

Rising costs aside, some boutique fund managers recognise there are benefits to some of the proposals, such as the one requiring fund management firms to appoint a custodian.

They would also be able to market themselves better as registered firms under MAS's purview - not as exempt ones. 'This provides investors clarity and comfort as to the managers' regulatory status in the home regulator's perspective,' said Ho Han Ming, chairman of the Alternative Investment Management Association's Singapore branch.

He pointed out that investors' requirements have been similar to those that MAS has proposed. 'It won't be entirely accurate to say that fund managers will be unfamiliar with these regulatory requirements because these already constitute part of the due diligence process adopted in the market.'

Added Mr Ho: 'You cannot expect the absence of these requirements if you want to start a fund management business in the current environment.'
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