Why do we attract hedge funds to Singapore?

hedge fundBesides the reader who contacted me with his thoughts on my post “Why a front office Singaporean core is important”, fellow London-based blogger Limpeh Is Foreign Talent has also responded with a post suggesting it’s not all the bad for Singapore’s financial services sector. I will comment further on what he wrote on.

First of all, I believe the point Limpeh is trying to make is that Singapore is still doing okay as a financial centre because top banking talent from around the world are still heading to the country. But he points out that this is more because our government is very welcoming of such talent than because they feel Singapore is a great country to live in.

I agree with him. Indeed, my message was that Singapore is doing fine now, but we must build up this talent pool to continue our status as a major financial centre because we can’t rely forever on low taxes, good infrastructure and a pro-business environment as competitive factors. Limpeh is equally critical of the government’s approach when he wrote that these foreign talent who set up businesses in Singapore are not hiring many locals, and neither are they settling down permanently.

Note that we discussed two different sectors of financial services. I wrote about the investment banking sector (after all I was discussing “front office” jobs) consisting mainly of foreign banks in Singapore that employs thousands of Singaporeans. Limpeh, on the other hand, wrote of skilled foreigners who set up offices, particularly hedge funds, in Singapore that help to enhance our global status even if limited number of jobs for locals are created.

The example Limpeh gave of two hedge fund managers relocating to Singapore provides an interesting aspect I shall elaborate on — specifically, this thing about Singapore trying to attract more hedge funds to its shores. Let’s look at it from a jobs creation perspective, which is important because it is one key reason why we would want any business to come in the first place.

There are many hedge funds around the world which are very large firms with hundreds of employees in their own marketing, operations and technology departments. Some, such as Man Group in the UK that sponsors the Man Booker Prize, are even listed on the stock exchange. However, despite the lure of low taxes in places such as Cayman Islands, British Virgin Islands and Luxembourg, you will find that most of these very large hedge funds are still based in the US or UK. This is partly because these countries are where the founders of these hedge funds hail from, and partly because of the ease in attracting talent in areas such as market knowledge or high frequency trading expertise.

On the other hand, the hedge funds in Singapore are predominantly smaller start-ups with one or two hedge fund mangers and less than a handful of staff. So they do not contribute much to job creation. Also, the locals that these funds do employ are usually for the analytical, clerical and support functions where they don’t learn much because they are seldom involved in investment decisions. I have a friend, a local first class honours graduate, who worked a few years in one before leaving because the fund manager wasn’t interested in sharing this knowledge.

Hedge funds, whether big or small, make use of prime brokerage services from investment banks. These services include capital introduction, trade execution, custody and clearance, margin lending and financing, securities lending and direct market access. Therefore, hedge funds also help to create thousands of jobs in investment banks. The problem for Singapore, though, is that the prime brokerage industry is primarily based in New York, London and Hong Kong. A hedge fund based in Singapore trading in Asian markets, for example, will trade through its prime broker in Hong Kong. As such, most of the job creation goes to Hong Kong, not Singapore.

One might think that since hedge funds handle huge amount of assets under management, this will bring big inflows of capital into Singapore. This is not true. These hedge funds may be physically based in the country, but they invest all over the world and their funds are likewise held all over the world (largely with their prime brokers in New York, London and Hong Kong). In fact, given the limited size of our local market, I doubt many hedge funds based here invest much within Singapore itself.

This is not to say that hedge funds do not contribute to our economy at all. After all, they do pay taxes and these foreign fund managers may well splurge on high living. There are also subsidiary industries such as law firms, tax advisories and fund administration companies that benefit, plus intangible benefits such as prestige as a wealth management centre to be gained from attracting high profile hedge funds.

How significant of a boost are they to the economy though? I am not entirely convinced, and it all goes back to the topic of developing local talent. If the arrival of foreign hedge funds does not translate to more locals getting jobs, picking up finance skills and gaining industry experience to grow the sector further organically from a Singaporean core, we should really question the purpose in us trying to lure more of them to come.