What Are the Regulatory Requirements for Managing Different Types of Funds?

Over the last one decade, the asset management business in Singapore has increased significantly due to the sound regulatory environment, strategic government promotion and investor trust within the financial system. The Monetary Authority of Singapore (MAS) grants licenses to fund management companies (FMC) which manage a diversified fund type, such as hedge funds, private equity (PE) funds, and real estate funds. Although these different fund structures may Meet different investor needs and strategies, they are all subject to the same core regulatory principles of investor protection, risk management, disclosure and operational integrity by MAS. This framework is also aligned with MAS fund management licenses Singapore requirements, ensuring that fund managers operate with transparency and accountability.

This paper will discuss the applicability of MAS regulations to various funds and regulatory expects FMCs to fulfill in managing various funds. Despite the fact that MAS has created a common regulatory framework through the Securities and Futures Act (SFA), the regulatory provisions of some rules will differ based on the type of funds, their structure and investors.

Unified Licensing Framework and Its Implications

Each and every fund manager conducting business in Singapore is required to be licensed or registered with MAS depending on the intended investors and the size of the business. These three major ones are:

• Registered Fund Management Companies -Are allowed to manage assets on behalf of up to 30 qualified investors and their asset under management (AUM) should not surpass S$250 million.
• Licensed Fund Management Companies -Retail LFMCs (dealing with retail investors), and Accredited/Institutional LFMCs (dealing only with accredited or institutional investors). Learn more about LFMC accredited investor license Singapore application requirements.
• Venture Capital Fund Managers -Possess a different, lighter regulation with special conditions, such as investing mostly in start-ups or early stage enterprises.

Having noted that the FMC can be dealing with hedge funds, PE funds or real estate funds, the licensing and compliance obligations are equalized in association to their category of investors and the character of their strategies.

With that said, depending upon the structure and the purpose of investing, fund-specific regulatory concerns, which include valuation, custody, leverage, and risk disclosure, can differ meaningfully. MAS requires managers to implement suitable controls that are commensurate to the risks of individual funds.

Regulatory Treatment of Hedge Funds

Hedge funds are characterized by their complex investment plans, extensive application of leverage, as well as seeking absolute returns. Such features may pose more risks to investors and the financial system, so MAS demands improved governance and risk management.

Key Regulatory Considerations for Hedge Funds in Singapore:

1. Accredited/Institutional Investor Base: The nature of most hedge funds is complex and speculative and hence most funds are sold to accredited or institutional investors. MAS stipulates that FMCs must conduct an evaluation together with the verification of the classification of investors prior to the marketing of such funds.
2. Risk Management and Leverage Controls: The manager of a hedge fund should have a clearly-documented risk management system that deals with the usage of derivatives, short-selling and leverage. One area where MAS might question is with regard to consistency of the funds exposure to the risk disclosures and mandates that are represented to investors.
3. Liquidity and Valuation: MAS anticipates that where hedge funds are invested in liquid markets, there should be strong internal processes to support daily or more frequent valuation. The fund valuation policies should also be subjected to regular reviews to attain fair value and adherence to the international valuation standards.
4. Disclosure Requirements: Hedge funds are required to fully disclose to investors information relating to investment strategy, fee arrangement (such performance fees), redemption terms as well as risk factors. The offering documents are supposed to be readable and not deceptive.

Although MAS does not micromanage the strategies of hedge funds, it expects the hedge fund managers to assure that their controls, audits and compliance systems can operate, monitor and manage operational and market risks.

Managing Private Equity Funds: Long-Term Focus, Different Obligations

Private equity (PE) funds are the investors, which generally invest in unlisted companies and have a long-term perspective and aim at value enhancement, operational enhancement, and exit. Due to illiquid nature and long fund cycles, PE funds face different regulatory issues. Professionals often strengthen their expertise through a private equity course Singapore deal structuring and exit strategies to navigate these challenges effectively.

Regulatory Requirements for PE Funds:

1. Suitability and Investor Eligibility: PE funds are typically sold to institutional and accredited investors since the minimum capital commitment, illiquidity, and long-term investment holding period make it an inappropriate investment vehicle to most investors. MAS stipulates that such characteristics must be properly disclosed in the offering materials.
2. Valuation Standards: Since PE funds invest in unlisted firms valuation is more subjective. PE managers are expected to follow reasonable valuation practices by MAS, which normally embraces globally recognized valuation techniques, such as discounted cash flow, comparable company analysis, or third-party appraisals. Such valuation needs to be reappraised after a period of time and to the investors, it has to be disclosed properly.
3. Custody and Safekeeping of Assets: Although MAS does not prescribe the rigid form of custody of PE fund assets (e.g., through SPVs), fund managers need to assure adequate segregation of client assets and establishing effective custody arrangements, even in circumstances where traditional custodians are not engaged.
4. Conflict of Interest and Governance: PE funds managers usually become members of the board of portfolio companies. MAS stipulates that there must be clear policies to address conflict of interest especially where the FMC has both fiduciary responsibility to the fund as well as decision making roles in the investee business.
5. Anti-Money Laundering (AML): Since most PEs investments are cross border, managers should establish strict AML and Know-Your-Customer (KYC) protocols in accordance with the stipulations of MAS.

Although PE funds are not traded and valued on a regular basis in comparison to hedge funds, they remain within the three main principles of MAS, transparency, accountability, and protection to investors. It focuses on good governance, valuation of assets, and good stewardship of long-term capital.

Regulatory Expectations for Real Estate Funds

Property funds invest either directly or indirectly in property assets, providing an investor with exposure to income generating properties or real estate development opportunities. These funds come with peculiar risks which include valuation risk, illiquidity, leverage risk and macro-economic sensitivity.

Key Regulatory Areas for Real Estate Funds:

1. Fund Structure and Licensing Real estate funds are most typically organized as closed-end funds and advised by LFMCs. The managers have to make sure that the offering document clearly shows the scope of investment of the fund, its distribution policies and the development risks.
2. Asset Valuation: Real estate assets are hard to value and should be appraised independently or by third-party valuation. MAS requires real estate fund managers to utilize professional valuers that are affiliated to standards such as the International Valuation Standards (IVS). It needs to be revalued periodically especially Prior to redemptions, new subscriptions or exits.
3. Custody Arrangements: In the conventional meaning of the word, real estate cannot be custodied; nonetheless, MAS requires that documentation relating to the ownership of real estate (e.g., title deeds) should be custodied. Escrow accounts and legal custodial arrangements should be well articulated to avoid misappropriation of assets.
4. Leverage and Financing:Typically real estate funds finance acquisitions or development with debt. MAS stipulates that fund managers have to provide leverage limits, financing terms and interest rate risks. Debt covenants and refinancing risks should also be observed by them to enable financial stability.
5. Disclosure and Exit Strategy: Fund managers should clearly explain the exit strategy of the fund, be it through sales of assets, IPOs or liquidations and they should keep the investor informed of any material development which has impact on value or liquidity of the investments.

The competing priorities that Real estate fund managers have to reconcile against include investor expectation of steady yields and financial and operational soundness and management, as within the regulatory principles of MAS.

Conclusion: What Are the Regulatory Requirements for Managing Different Types of Funds

Although MAS deploys similar regulatory framework to all the licensed fund managers, the character of investment strategy of a fund greatly influence the kinds of requirements imposed on managers. Hedge funds: Liquidity management and risk monitoring should be emphasized; PE funds: Accurate valuation over the long-term and good governance; Real estate funds: Good practice in property valuation, leverage and asset protection.

Finally, the regulation of MAS is based on the principles of risk-based supervision, investor protection, transparency and operational soundness. It is assumed that fund managers are in a position to know the particular risk profile of the funds they are managing and to adjust their governance, compliance and disclosure processes accordingly.

As Singapore proceeds to establish itself as an international centre in asset management, the MAS regime has been acting as a guardian of systemic soundness as well as a facilitator of sustainable innovation in fund strategies. Managers that gear their operations towards such regulatory expectations will be in a good position to develop sustainably and win the confidence of the regulators and investors.