INSEAD Library

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Starting a hedge fund Chapter One -- Hedge Funds in Asia -- an Overview........................................................................I Peter Douglas CAIA, Principal, GFlA pte Ltd, Singapore Overview............................................................................................................................................................................................................. I Growth................................................................................................................................................................................................................ I Japan.................................................................................................................................................................................................................. 3 Hong Kong.......................................................................................................................................................................................................3 Singapore........................................................................................................................................................................................................ 4 Australia ........................................................................................................................................................................................................... 4 South Korea...................................................................................................................................................................................................... 4 Appetite for capital.......................................................................................................................................................................................... 4 Characteristics specific to Asian strategies ...............................................................................................................................................4 Asian appetite for hedged product..............................................................................................................................................................5 Chapter Two -- The Evolving Role of the Prime Broker....................................................................7 David Leahy, Credit Suisse, Hong Kong Introduction...................................................................................................................................................................................................... 7 Start-up services............................................................................................................................................................................................. 7 Capital introduction........................................................................................................................................................................................... 8 Securities lending.......................................................................................................................................................................................... -9 Operationsand technology................................................................................................................................................................................ 9 Clientservice.................................................................................................................................................................................................. .0 I Muffiple prime relationships.............................................................................................................................................................................. ..I 0 Innovation........................................................................................................................................................................................................... I I Conclusion..................................................................................................................................................................................................... I I Chapter Three -- Structuring a Hedge Fund in Asia Using Offshore Centres................................13 Rory Gallaher, Deacons, Hong Kong The Cayman Islands..................................................................................................................................................................................... 16 Bermuda.......................................................................................................................................................................................................... 18 British Virgin Islands.................................................................................................................................................................................... 20 Dublin.............................................................................................................................................................................................................. 21 I Table of Contents Starting a Hedge Fund .Asian Perspective an Qualirjhg investor scheme........................................................................................................................................................................ 21 Professional schemes..................................................................................................................................................................................21 Available fund structures......................................................................................................................................................................... 22 Limited liability company............................................................................................................................................................................. 22 Unit trust........................................................................................................................................................................................................... 22 Protected celVsegregated porlfolio companies....................................................................................................................................... 23 Limited liability partnerships .............................................................................................................................. 23 Duties and responsibilities of the fund's operators............................................................................................................................... 23 The management company....................................................................................................................................................................... -24 Trustee/custodian..........................................................................................................................................................................................24 The administrator......................................................................................................................................................................................... -24 Prime broker.................................................................................................................................................................................................. 24 Performancefees......................................................................................................................................................................................... 24 Chapter Four . Considerations in Selling Hedge Funds to Key European Investors................................................................................................................................. 27 Stuart Martin, Dechert LLP, London Public promotion and UCITs....................................................................................................................................................................... 27 Recent and current developments.......................................................................................................................................................... 27 The United Kingdom..................................................................................................................................................................................... 28 28 Open-ended funds in the UK................................................................................................................................................................. Promotion of hedge funds in the UK..........................................................................................................................................................28 .................................................................................................................................. New developments in the UK.......................... . . 29 France............................................................................................................................................................................................................. 30 Germany................................................................................................................................................................................................... 30 Switzerland.................................................................................................................................................................................................... 31 Belgium........................................................................................................................................................................................................ 32 The Netherlands........................................................................................................................................................................................... 32 Sweden................................................................................................................................................................................................. 33 Italy..................................................................................................................................................................................................................... 33 34 Ireland.................................................................................................................................................................................................... Spain............................................................................................................................................................................................................... 34 Luxembourg............................................................................................................................................................................................ 35 Conclusion................................................................................................................................................................................................... 35 Chapter Five -- Key Considerations in Selling Hedge Funds to US Investors..............................37 Adrienne M, Baker, Susan C. Ervin. John V. O'Hanlon and Karen L. Anderberg. Dechert LLP 37 1. The US: Historical securities and investmentfund regulatory issues............................................................................................ 38 Securities law considerations.................................................................................................................................................................... 38 Offering hedge funds privately to US investors ..................................................................................................................................... Summary........................................................................................................................................................................................................ 40 2 . Key US tax considerationsfor US investors in non-US hedge funds ........................................................................................... 40 Non-US partnership................................................................................................................................................................................. 41 Non-US corporation...................................................................................................................................................................................... -41 Mirror funds................................................................................................................................................................................................. 42 Master-feederfunds...................................................................................................................................................................................... 42 Summary................................................................................................................................................................................................. 42 Table of Contents Starting a Hedge Fund .Asian Perspective an 3. US regulatory issues for hedge funds engaging in derivatives....................................................................................................43 Commodity pool regulation....................................................................................................................................................................... 43 Key regulatory requirements applicable to CPOs.................................................................................................................................. 43 Key CPO registration exemptions.............................................................................................................................................................. 44 The Rule 4.7 exemption............................................................................................................................................................................... 44 Summary......................................................................................................................................................................................................... 44 Chapter Six . Recent Amendments to the Regulation of Foreign Hedge Fund Managers in Australia.................................................................................................................................................... 47 Scott Charaneka and Julie Tramsak, Deacons. Australia What is the difference between a retail and wholesale investof?............................................................................................................... 47 Recent amendments to the regulation of foreign wholesale fund managers.................................................................................... 47 What is the relief?.......................................................................................................................................................................................... 48 What specific relief has ASIC provided to foreign wholesale fund managers?................................................................................48 Operating under the Class Order exemption.......................................................................................................................................... 49 Conclusion.................................................................................................................................................................................................... 50 Chapter Seven -- Marketing Offshore Hedge Funds to Japanese Investors................................51 Yogo Kimura, Mori Hamada and Matsumoto. Tokyo JSDA Rules.................................................................................................................................................................................................... 52 Contractual-type............................................................................................................................................................................................ 52 Coporate-type............................................................................................................................................................................................... 53 Disclosure requirements under the SE Law Japan .............................................................................................................................. 53 Public offerings............................................................................................................................................................................................. 53 Private placement to Qlls............................................................................................................................................................................ 55 Private placement to a small number ofpersons (shouninzu shibo)................................................................................................. 55 Requirements...............................................................................................................................................................................................-55 Private placement of newly-issued securities to a small number of persons (49 or less) together with a private placement to 250 or less Ql Is (kakudai shouninzu shibo)......................................................................................................................... 56 ............................................................................................................................................................................ 56 Secondary sale (uridash~) FSAfilingrequired under the Investment Fund Law................................................................................................................................ 56 Registrationwith the FSA............................................................................................................................................................................-56 Registration of changes.................................................................................................................................................................................. 57 Addendum....................................................................................................................................................................................................... 58 Chapter Eight -The Regulation of Hedge Funds in Hong Kong..................................................... 59 Rory Gallaher, Deacons. Hong Kong Offer to 'the public'...................................................................................................................................................................................... 59 Chapter Nine -- The Regulation of Hedge Funds in Singapore.......................................................63 Amold Tan, Rajah and Tann. Singapore . . Introduction...................................................................................................................................................................................................... 63 63 Regulatory climate in Singapore for hedge funds .................................................................................................................................. Themodem hedge fund.............................................................................................................................................................................. 63 Broad definition of a hedge fund in the Singapore regulatory context................................................................................................ 64 Securitiesand Futures Act ........................................................................................................................................................................... 64 and Licensing of industry participants.............................................................................................................................................................. I iii Table of Contents Starting a Hedge Fund .Asian Perspective an Fund managers................................................................................................................................................................................................ 64 Distnibutors/marketingagents.................................................................................................................................................................... 64 Legal structure............................................................................................................................................................................................. 65 Regulations relating to the marketing and offering of hedge funds in Singapore.......................................................................... 65 Definition of collective investment schemes........................................................................................................................................... 65 The marketing of hedge funds on a private or restricted basis......................................................................................................... -65 Filings and approval- offers to sophisticatedinvestors.................................................................................................................... 66 Marketing to the public in Singapore.......................................................................................................................................................... 66 Singapore collective investment schemes..............................................................................................................................................66 Collective investment schemes outside Singapore............................................................................................................................... 67 The Code for Collective Investment Schemes........................................................................................................................................ 67 Qualificationsof the manager...................................................................................................................................................................... 67 Minimum subscription requirements........................................................................................................................................................ 67 Disclosurerequirements..............................................................................................................................................................................67 . . Listing of hedge funds In S~ngapore ......................................................................................................................................................... 68 Eligibility for listing on the SGX-ST...........................................................................................................................................................68 Investments................................................................................................................................................................................................... 68 Investmentpolicy ........................................................................................................................................................................................ 68 Investmentmanager.................................................................................................................................................................................... 68 Prospectus requirements............................................................................................................................................................................. 68 Chapter Ten -- Marketing and Selling Offshore Hedge Funds in Korea........................................69 Joon Park, Young-Man Huh and Pil-Kook Lee. Kim and Chang. Seoul Introduction................................................................................................................................................................................................ 69 Registrationrequirements.......................................................................................................................................................................... 69 Sales to qualified investors only.......................................................................................................................................................... 69 Sales to non-qualified investors................................................................................................................................................................. 70 Eligibility of offshore hedge funds....................................................................................................................................................... 70 Chapter Eleven -- Marketing of Hedge Funds in Taiwan..................................................................73 Sherry S. L. Lin. Lee and Li. Taipei Regulations and regulators........................................................................................................................................................................ 73 Restrictionson marketingforeign funds in Taiwan............................................................................................................................... 73 Channels for investors in Taiwan to purchase foreign funds ............................................................................................................. 73 Securities firms permitted to engage in the brokerage of foreign securities.................................................................................... 73 Non-discretionary foreign exchange trust funds..................................................................................................................................... 74 Registration of foreign funds in Taiwan................................................................................................................................................... 74 Conclusion..................................................................................................................................................................................................... 74 Chapter Twelve . of the lnternet in Marketing and Distributing Hedge Funds Use 75 in Hong Kong........................................................................................................................................... Scott Carnachan, Deacons. Hong Kong . Use of the Internet for authorised hedge funds......................................................................................................................................... 75 Overview of regulatory regime................................................................................................................................................................... 75 SFC's regulatory approach......................................................................................................................................................................... 75 Advertisements on the Internet.................................................................................................................................................................. 76 Offering authorised hedge funds on-line in Hong Kong....................................................................................................................... 76 Electronic dealings...................................................................................................................................................................................... 77 Communicationwith investors via electronic means ........................................................................................................................... 78 . Table of Contents Starting a Hedge Fund .Asian Perspective an Use of the Internetfor unauthorised hedge funds.................................................................................................................................. 78 Overview......................................................................................................................................................................................................... 78 The 'professionalinvestor' exception...................................................................................................................................................... 78 The 'privateplacement' exception.............................................................................................................................................................. 79 Use of the Internet for marketing unauthorised hedge funds in Hong Kong.................................................................................... 80 Chapter Thirteen: Equalisation: Ensuring Investors are Treated Equitably.................................. 81 Tony McDonnell and Allard de Jong. HSBC The case for equalisation.................................................................................................................................................................................... 81 Free riding....................................................................................................................................................................................................... 81 Shareprices going up......................................................................................................................................................................................... 81 Types of equalisation............................................................................................................................................................................................ 82 Series accounting.........................................................................................................................................................................................82 Equalisation shares..................................................................................................................................................................................... 82 Equalisationfactorlcontingent redemptions.................................................................................................................................................. 82 Compulsory redemptions................................................................................................................................................................................... 83 Conclusion..................................................................................................................................................................................................... 84 Chapter Fourteen -- Hedge Funds: An Accountant's Perspective.................................................. 85 Florence Chan, Victor Yung. Ang Siew Lian. Lim Gek Khim. Tobias Lintvelt and Antoinette Elias. Ernst and Young Introduction..................................................................................................................................................................................................... 85 A . HONG KONG ............................................................................................................................................................................................ 85 85 Factors to consider for the optimal structure of a hedge fund .............................................................................................................. Hong Kongtaxes to consider..................................................................................................................................................................... 85 86 A typical hedge fund structure.................................................................................................................................................................... 86 The fund -offshore and onshore.............................................................................................................................................................. Onshorehedge fund............... . ................................................................................................................................................................ 86 Offshore hedge fund....................................................................................................................................................................................... 86 Investors......................................................................................................................................................................................................... 86 The manager................................................................................................................................................................................................ 87 The promoter................................................................................................................................................................................................. 87 B. SINGAPORE............................................................................................................................................................................................88 Incometax..................................................................................................................................................................................................... 88 General........................................................................................................................................................................................................... 88 Onshore funds ............................................................................................................................................................................................. 88 Taxation of unit trusts in general................................................................................................................................................................... 89 89 Designated Unit Trust (DUV Scheme........................................................................................................................................................ Offshorefunds .............................................................................................................................................................................................. 89 90 Tax Exemption Scheme forAsset Management............................................................................................................................................. 91 Specified income and designated investments..................................................................................................................................... Designated Unit Trust (DUT) Scheme...................................................................................................................................................... 91 Stamp duty...................................................................................................................................................................................................... 91 Estate duty..................................................................................................................................................................................................... 91 Futuredevelopment...................................................................................................................................................................................... 92 Limited partnership (LP).............................................................................................................................................................................92 . Limited liability partnership (LLP)............................................................................................................................................................. 92 - Table of Contents Starting a Hedge Fund . Asian Perspective an C. JAPAN.......................................................................................................................................................................................................92 Corporatestructures.................................................................................................................................................................................... 92 Purpose of the investmentstructure..................................................................................................................................................................92 Separate functions: Investor-related and management of investments............................................................................................93 Various structuring alternatives.................................................................................................................................................................93 Incorporated form: Tokuteimokuteki kaisha (TMK)................................................................................................................................94 Real estate investment trust (J-REIT)..................................................................................................................................................... 94 D. AUSTRALIA.............................................................................................................................................................................................. 95 95 Regulatory restrictions on choice of vehicle............................................................................................................................................ Overview of Australian taxation system..................................................................................................................................................... 96 Managed investment schemes (MIS)....................................................................................................................................................... 96 Taxationof a managed investment scheme...........................................................................................................................................97 Taxation of distributions.............................................................................................................................................................................. 97 Taxationof a company.................................................................................................................................................................................. 98 Sale of shares................................................................................................................................................................................................. 98 Other taxation issues................................................................................................................................................................................... 98 The Sponsors: Biographies and Contacts .......................................................................................... 99 Contact Details for Authors ................................................................................................................... 108