As is widely known, there have been ongoing anti-government protests and demonstrations in Hong Kong for the past six months. Most hedge fund managers based in the region have told investors that everything is okay and that there is nothing to worry about. However, this contradicts what we heard firsthand from managers and allocators in Singapore. The sentiment seems to be changing. It seems that Hong Kong is not as safe and stable as managers want you to believe. In fact, we predict that you will see hedge funds relocating to Singapore over time, given the unfortunate situation in Hong Kong.
While the physical protests in Hong Kong will ultimately come to an end, the animosity toward China will not. The issue is less about safety and more about lack of freedom and autonomy in the region. Lack of trust and stability can be detrimental to the economy, especially in the financials sector, where political and regulatory risks are significant considerations. In fact, the Hong Kong government announced its first recession in the third quarter of 2019 since the financial crisis, and they expect negative growth through year-end as well. Additionally, according to Reuters, tourist arrivals in Hong Kong have plunged 43.7% from a year ago and retail sales in October fell by 24.3% (the steepest decline on record). Corporate events have also been cancelled or sparsely attended. Like tourists, investors don’t want to visit Hong Kong due to the violent protests. We even hear that allocators have postponed future trips to the region. It appears that the situation is unlikely to get any better, at least in the near term. Moreover, there is the risk that China increases its control of Hong Kong from here. From our point of view, this could all lead to less capital flowing to hedge fund managers based in Hong Kong, which would give them a strong incentive to leave the region.
Singapore is the next best alternative to Hong Kong. Many reputable and institutional hedge fund firms are already based in Singapore and there are a multitude of reasons why it could become the preferred destination for hedge fund managers. Some of those reasons include: the ease of doing business, rule of law, political stability, a well-educated and English-speaking workforce, good quality of life, and Singapore’s geographical proximity to most Asian countries. Like Hong Kong, Singapore has a clear regulatory framework for operating a hedge fund. Singapore also has competitive taxes, including low effective personal and corporate tax rates.
While we have not witnessed any movement just yet, we expect the shift to start to take root over the next 12 to 24 months. In fact, according to our contacts, some Hong Kong managers have already applied for licenses in Singapore and a number of Hong Kong managers already have contingency plans in Singapore. It is something PivotalPath will be monitoring going forward and something that investors, especially those investing in Asia, should monitor as well. Here is what we are watching to indicate the shift is happening:
-
The number of new launches in Singapore versus Hong Kong
-
The number of established managers in Hong Kong establishing a new presence in Singapore
-
The number of outright relocations from Hong Kong to Singapore
-
The number of office closures in Hong Kong
-
Redemptions from managers based in Hong Kong, irrespective of performance
-
Capital inflows to existing funds based in Singapore