MAS guidelines on retail hedge funds 'useless'

Newly-issued guidelines by the Monetary Authority of Singapore (MAS) governing offerings of hedge funds to the public will have little or no effect on broadening investment choices for the retail market says a consultant in the asset management industry.

"Hedge fund managers have no interest in the retail market," says Peter Douglas, principal at asset management consultancy GFIA, based in Singapore. Hedge funds are typically small business which do not have the infrastructure suitable to support retail investors, he observes. Furthermore, retail customers typically offer smaller fees for the smaller transactions. Therefore, the impact of new guidelines included as an appendix in the Handbook on Unit Trusts, will be "minimal to the point of unobservable", predicts Douglas.

The new guidelines will allow hedge funds to be sold to the public subject to a minimum initial subscription of $100,000 per investor. Such public offers of hedge funds are to include adequate and prominent disclosure in the prospectus of the high risks associated with investing in hedge funds. In addition, investment managers and investment advisers of hedge funds must have expertise in managing such funds.

However, for the fund-of-fund market, the guidelines may provide some benefit. According to Douglas, the guidelines will allow for diversified hedge funds, the benefits of which will be significant. This is especially true if fund managers are able to develop expertise and package the diversified hedge funds, he says, adding that the minimum initial subscription is at a level that should make it popular and accessible to multi-managers.

MAS says that the rationale behind the inclusion of this appendix is that, "hedge funds differ significantly from traditional retail funds. For instance, hedge funds may leverage significantly or sell short to improve performance. They may also use derivatives more extensively and invest in higher-risk instruments. In recognition of their more aggressive investment strategies, MAS has put in place specific guidelines to govern offerings of such funds."

However, Douglas points out that the appendix which is an insertion to the law in relation to unit trusts under the Singapore's Companies Act, will soon be obsolete, as the pending Securities and Futures Act (SFA) is expected to take unit trusts out of the Companies Act and put them under the umbrella of "collective investment schemes" in the SFA. The SFA legislation is expected to be passed in the next six months. "These guidelines are an interim step only," comments Douglas. He expects that the final word on hedge funds is still to come and more such guidelines will be embodied under the SFA.