Formation and managementForms of vehicle
What legal form of vehicle is typically used for hedge funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
Hedge funds are generally established in Singapore as a corporate entities, such as private limited companies or variable capital companies (VCCs). These corporate vehicles have separate legal personality from investors and the manager under Singapore laws.
Due to the open-ended nature of hedge funds and the potential for multiple strategies that may require the establishment of multiple sub-funds, hedge funds are generally incorporated as corporate vehicles with sub-funds having separate legal personality. In particular, it is possible for an umbrella VCC to have multiple sub-funds, each with different investment objectives and strategies, and with segregated assets and liabilities.
Where a hedge fund has separate legal personality, the legal consequence is that investors and the manager would have limited liability and not be personally liable for the hedge fund’s actions, debts or obligations.Formation process
What is the process for forming a hedge fund vehicle in your jurisdiction?
In the usual course, it may take up to six months to form a Singapore hedge fund.
Generally, the fund formation process comprises the establishment of the fund entities and the appointment of various advisers and service providers, including legal counsel, tax advisers, the administrator, the custodian, the prime brokers and the corporate secretarial service provider.
The formation process also entails the preparation of the fund documentation, which generally comprises the private placement memoranda, the subscription agreements, the investment management agreement and any ancillary documentation, including the launch resolutions and constitutive documents of the hedge fund.
To incorporate a hedge fund in Singapore, initial filings (eg, reservation of name, submission of application details) would be made by the corporate secretary of the fund with the Singapore Accounting and Corporate Regulatory Authority (ACRA) to incorporate the fund. The incorporation process is done electronically and takes about three business days to complete. There are no minimum capital requirements applicable to a Singapore hedge fund.
Examples of ongoing expenses that may be incurred in the establishment of a hedge fund include fees for legal services, tax services and administration or regulatory compliance services. Other ongoing costs include the initial set-up costs (eg, the incorporation of the fund), as well as other operating costs, such as fees payable to service providers including the administrator, the prime broker or the corporate secretary.Custodianship and administration
Is a hedge fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary? If so, how is that requirement typically satisfied?
A Singapore licensed or registered fund manager (Singapore fund manager) managing a Singapore hedge fund is subject to certain regulatory requirements by the Singapore Securities and Futures Act, which may result in the Singapore hedge fund engaging the relevant service providers (eg, the administrator, the prime broker).
There are local requirements to maintain a Singapore-resident corporate secretary and registered office. The corporate secretary would, as an operational matter, maintain the fund’s books and records and make the relevant corporate secretarial filings with ACRA.
Pursuant to the Securities and Futures (Licensing and Conduct of Business) Regulations, a Singapore fund manager is required to ensure that the fund’s assets under management are subject to independent custody. Independent custodians include duly licensed, authorised or registered prime brokers, depositories and banks. It is also a requirement that the fund’s assets under management are subject to independent valuation and customer reporting, which may be satisfied by a third-party service provider such as a fund administrator.
To the extent that the Singapore hedge fund will be managed by a Singapore fund manager, the requirement to engage an administrator or custodian may apply to the hedge fund, regardless of whether the hedge fund vehicle is domiciled in Singapore.
The requirement is typically satisfied by the hedge fund entering into a contractual agreement with the relevant service provider (eg, an administration agreement, a custodian agreement or a corporate services agreement).Public access to information
What access to information about a hedge fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
For hedge funds incorporated as Singapore private limited companies, it is possible for members of the public to purchase the shareholders’ information (eg, the identities of the investors and the amounts of their paid-up capital amount) by purchasing a business profile search electronically through the ACRA portal.
For hedge funds incorporated as Singapore limited partnerships, the identity of the limited partners need not be disclosed and will not be open to access or inspection by the public if certain requirements are met, including the Singapore limited partnership being managed by an appropriately licensed or regulated fund manager.
For hedge funds incorporated as Singapore VCCs, while the VCC must maintain a register of shareholders, unlike an ordinary Singapore private limited company, the register need not be made available to the public. However, the register must be disclosed to the public authorities upon request for regulatory, supervisory and law enforcement purposes.Third-party investor liability
In what circumstances would the limited liability of third-party investors in a hedge fund formed in your jurisdiction not be respected as a matter of local law?
As a matter of Singapore law, the limited liability of third-party investors in a locally established hedge fund will be respected, save for exceptional and limited cases.
One example would be where a third-party investor in a hedge fund constituted as a Singapore limited partnership loses its limited liability status by taking part in the management of the limited partnership. If so, pursuant to the Singapore Limited Partnerships Act, the third-party investor would be liable for all debts and obligations of the limited partnership incurred while taking part in the management, as though the limited partner were a general partner.
Another example in which the ‘corporate veil’ will be lifted (ie, where the courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts) is where there are abuses of the limited liability status of the fund, such as where the fund is used to evade legal obligations or to commit fraud, or is being used as a sham and façade.Fund manager’s fiduciary duties
What are the fiduciary duties owed to a hedge fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction? To what extent can those fiduciary duties be modified by agreement of the parties?
The directors of a Singapore hedge fund incorporated as a company owe fiduciary duties at common law to, among other things, act bona fide and in the interest of the fund, to avoid conflicts of interest, and to use its powers only for proper purposes. Further, under the Singapore Companies Act, a director of a company who is in any way interested in a transaction or proposed transaction with the company must declare the nature of his or her interest.
Fiduciary obligations are also present at common law. The Singapore courts have, in the context of a claim brought against an individual investment adviser, also considered the various principles regarding fiduciary obligations, including certain relationships that may give rise to fiduciary obligations, such as trustees, agents, solicitors and company directors.
The Singapore fund manager of a Singapore hedge fund also owes certain statutory duties to the Monetary Authority of Singapore (MAS) under the Securities and Futures (Licensing and Conduct of Business) Regulations, including a duty to comply with all laws and rules governing the fund manager’s operations, implementing and ensuring compliance with written policies on the fund manager’s operational areas, and identifying, addressing and monitoring the risks associated with the business activities of the fund manager.
To our understanding, a fund manager’s fiduciary duties are not prescribed by law and can be contractually modified by agreement in the management agreement between the fund and the manager.Management liability and negligence
What standard of liability applies to the management of a hedge fund formed in your jurisdiction? Does your jurisdiction recognise ‘gross negligence’ (as opposed to ‘ordinary negligence’) in this regard?
The standard of liability applicable to a manager for the management of a Singapore hedge fund is that of ordinary negligence.
From our observations, the concept of gross negligence has been recognised by the Singapore courts in the context of contractual disclaimer clauses. Notwithstanding this, the Singapore courts have considered that the term ‘gross negligence’, as a concept, cannot be defined because the circumstances giving rise to this duty to act varies from case to case and also varies in infinite degree.Governance and other special issues or requirements
Are there any governance or other special issues or requirements particular to hedge fund vehicles formed in your jurisdiction? Does your jurisdiction impose any environmental, social and governance (ESG) obligations on hedge funds or their managers?
There are certain special requirements particular to Singapore VCCs.
Under current VCC legislation, the VCC can only be incorporated with the appointment of an appropriately licensed or registered Singapore-based fund manager to manage it, and it must have an appointed manager at all times. This is a special feature that is unique to a Singapore hedge fund incorporated as a VCC.
Further, under the VCC Act, shares of a VCC are required to be issued, redeemed or repurchased at a price equal to the proportion of the net asset value (NAV) of the VCC represented by each share. The requirement of issuing and redeeming shares at NAV is in contrast to hedge funds incorporated as Singapore private limited companies under the Companies Act, which require, among other things, the directors of the fund to lodge a solvency statement if redemptions of preference shares are made out of the company’s capital.
Separately, the MAS issued the Guidelines on Environmental Risk Management for Asset Managers in December 2020 to enhance the resilience of funds that are managed by asset managers, by setting out sound environmental risk management practices that asset managers can adopt.
The MAS is also expecting asset managers to consider implementing mechanisms to monitor compliance with stated ESG investment objectives.Fund sponsor insolvency or change of control
With respect to institutional sponsors of hedge funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the hedge fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the hedge fund's sponsor?
The insolvency or restructuring of a hedge fund sponsor would generally not have an impact on the hedge fund or the fund manager, as they are separate legal entities from the sponsor.
Notwithstanding this, the fund documentation of the hedge fund would customarily set out the consequences in the event of insolvency, restructuring or similar events affecting the sponsor, such as the right to remove the fund manager or the general partner (in the case of a limited partnership) if they are affiliates of the sponsor. It is not customary to provide for the automatic trigger of dissolution of a hedge fund upon the occurrence of such an event, as the fund documentation would generally provide for language to remedy the event (eg, appointment of a replacement fund manager or general partner).
It is a standard licence condition that the Singapore fund manager should immediately inform the MAS of any matter that may materially adversely affect its financial position. Accordingly, where the sponsor is a shareholder of the manager and subsequently becomes insolvent, such that the manager’s financial position is materially adversely affected and the matter would usually be notified to the MAS, this may constitute a breach of the manager’s licensing conditions. Further, where the sponsor is an affiliate of the Singapore fund manager and undergoes a change of control that affects the shareholding of the manager (whether directly or indirectly), there may be regulatory obligations imposed on the Singapore fund manager to seek prior approval from the MAS of such change of control at the sponsor level.
Another instance where the insolvency of the fund sponsor for a Singapore hedge fund may trigger legal consequences is where the fund is incorporated as a Singapore VCC. Under current VCC legislation, a Singapore VCC must be incorporated, and at all times be managed by a Singapore-based manager that is appropriately licensed or registered. If the sponsor becomes insolvent, such that the manager itself becomes insolvent or breaches any conditions of its CMS licence, the VCC would be affected because of the regulatory requirement that the VCC be managed by an appropriately licensed or regulated Singapore fund manager at all times.