The two cities have set up new fund structures to lure wealth away from traditional offshore financial centres
In 2020, the pandemic halted travel and shut borders. But at the same time, two of Asia’s biggest financial hubs saw an opportunity to shift the global centre of gravity for hedge funds and the world’s wealthiest families. Singapore established the “variable capital company”, a fund structure that allows a wide range of potential users to shelter large pools of capital in discreet, lightly taxed wrappers domiciled in a well-regulated financial centre. Hong Kong made enhancements to the “open-ended fund company”, a similar structure it had established two years earlier. The vehicles are a direct challenge to existing offshore centres such as the British Virgin Islands, Mauritius and the Cayman Islands, and their advocates predict they could herald big changes in the way money is managed. “We see this as the start of a massive shake-up of asset management, of family offices and the whole flow of capital,” says a Singapore-based partner of one UK law firm involved in setting up the new structures in both cities. “This sets the path for [HK and Singapore] to be the heart of a new hybrid between family offices and hedge funds.” Investor take-up, particularly in Singapore, has been rapid. The bankers, fund managers and lawyers involved in setting them up say their impact could be far more widespread and disruptive than previously imagined, drawing assets and expertise into the region. To them, the innovations represent exactly the kind of regulatory boldness Asia needs. “Singapore has always been the poorer cousin compared with the Cayman Islands, British Virgin Islands and even places like Mauritius,” says Ryan Lin, a lawyer at Bayfront Law, who describes the new structure as “a game changer”. “[The VCC] came just as Singapore became increasingly popular as a wealth and fund management hub . . . it was extremely well-timed”. The new vehicles represent a direct challenge to traditional offshore finance centres whose success has been built on privacy and low taxes and whose economies are heavily dependent on the revenue generated by financial services. Others fear they will create a fertile space for money laundering and tax avoidance. Maíra Martini, a research and policy expert at campaign group Transparency International, says the risk with vehicles such as OFCs and VCCs is that they “usually function like a black box” and “can be very attractive to the corrupt and other criminals”. Bringing it home Hong Kong spotted its opportunity in the wake of the Panama Papers and Paradise Papers leaks, which in 2016 and 2017 sparked hundreds of news stories worldwide about the use, and abuse, of offshore funds in the Caribbean. The stories made some institutions, especially public pension funds, more cautious about the reputational risks of investing in private equity and hedge funds domiciled in places such as the British Virgin Islands and Cayman Islands. Investors were looking for alternatives because the public had started to “think that people only put money into the Caymans to hide something”, says a Hong Kong-based financial adviser. The territory spotted an opportunity after leaked documents led to hundreds of news stories about the use of offshore funds in the Caribbean. In 2018, the territory’s regulators introduced its alternative, the OFC, which aimed to “enrich the choice of investment vehicles and facilitate the distribution of Hong Kong funds internationally”. OFCs are corporate fund vehicles that are domiciled in Hong Kong and whose units can be offered to the public or held privately. The investments within them must be managed by an entity licensed as an asset manager in Hong Kong. According to the adviser, who has worked on OFCs, the territory “was trying to capitalise on this trend” as well as attract lucrative business and help solidify its position as a global financial hub. Singaporean authorities, frustrated at the tendency of local fund managers to register investment vehicles offshore rather than in Singapore itself, launched the rival VCC in 2020. The city-state made it easier for overseas and domestic entities to register an investment vehicle in Singapore provided they had a local entity to manage it. Despite the “variable” moniker, VCCs can also have fixed capital, allowing them to cater to a diverse range of potential users including mutual fund groups, hedge funds, private equity, real estate firms and managers of family wealth. The single locally incorporated structure can hold a pool of assets and multiple sub-funds, cutting down on costs. It is also covered by more than 70 double taxation agreements, making it less likely that the assets within it will be taxed twice over.
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