Entrepreneurship in finance

HENRI ARSLANIAN ENTREPRENEURSHIP IN FINANCE Successfully Launching and Managing a Hedge Fund in Asia Entrepreneurship in Finance Henri Arslanian Entrepreneurship in Finance Successfully Launching and Managing a Hedge Fund in Asia Henri Arslanian Adjunct Associate Professor University of Hong Kong, Hong Kong ISBN 978-3-319-43912-9 ISBN 978-3-319-43913-6 DOI 10.1007/978-3-319-43913-6 (eBook) Library of Congress Control Number: 2016953826 © The Editor(s) (if applicable) and The Author(s) 2016 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Cover illustration: © Kiyoshi Takahase Segundo / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Dedicated to my friend Michael Nardella (1982–2016) who contributed greatly to this book, but tragically passed away before he could see it come to completion This one is for you buddy Preface and Acknowledgements My grandparents used to have a sign in their basement in Montreal that said in French, “Ne laissez jamais ce que vous êtes, être un obstacle ce que vous pouvez devenir”, which translates into: “Never let who you are today be an obstacle to what you can become in the future.” That quote has always stuck with me to this day, coming from a family that survived the Armenian genocide and who had to start from scratch during the last century, each generation starting over in a new country From my early days as a funds lawyer to my investment bank hedge fund consulting days, I’ve met hundreds of individuals who wanted to launch their own fund However, the vast majority of these people ended up never doing it It was generally not because they didn’t have the ambition or the drive, but often because there was simply no information available on how they should begin They didn’t know where to start, whom to ask for advice or where to find the relevant information The fact that this information mismatch exists today is unacceptable as it’s not only stopping new entrepreneurs from launching their own funds, but it’s also negatively affecting the broader financial industry as there are fewer new launches and fewer individuals taking the plunge into entrepreneurship Many would still launch and almost inevitably fail not because of lack of hard work or perseverance, but rather because of the lack of information and knowledge that was available This caused them to launch a business built on a weak foundation and unable to become institutionalised thus putting them on a route to almost certain failure As an entrepreneur in the heart, I always wanted to help these individuals and am very happy that this book will finally be able to empower many new entrepreneurs to realise their dreams and launch their own fund vii viii Preface and Acknowledgements It is important to note that the information provided in this book has rarely been made available, affordable or easy to find in such a cohesive way In addition, all the author’s proceeds from this book will be donated to the charity Help For Children, also known as Hedge Funds Care, a charity that shows the caring and giving angle of the hedge fund community that so few talk about This book is addressed to all of you who might be interested in starting an entrepreneurial journey and launching your own hedge fund It will give you the important information you need and should hopefully not only put you on the right path, but also empower you to ask the right questions I also hope that it will help many university students and various members of the hedge fund ecosystem, from law firms to fund administrators, who want to learn more about the process of launching a hedge fund When I started teaching my first course on entrepreneurship in finance in the University of Hong Kong’s Master in Finance program, I was shocked to see that there was no book available that I could use as course material I spent more than 200 hours of my spare time putting together slides and course material to teach students how to launch a hedge fund, private equity or venture capital fund It was that gap that became another driver to wanting to see this book come to fruition Writing this book was an intense journey with many ups and downs, some more unimaginable than others, and I learned a lot in the process I always wondered why there wasn’t a book on the market that explained how to launch a fund After writing it, and realising the time and efforts it takes, I realised why! Thanking everyone who inspired me to write this book would be impossible, but I would like to take the time to thank some individuals who really stood up and came to help at times when the future of this book was uncertain To Michael Nardella, Stefan Nilsson, Anna Stephenson, Ayyaz Ahmad, Mark Wightman and Jeb Altonaga who contributed large parts of certain chapters Without their help, I can honestly say that this book would never have seen the light of day and I am incredibly grateful for their support To Philip Tye, Marc Towers, George Saffayeh and the entire team at EY, Anne-Marie Godfrey and her team at Akin Gump, AnnMarie Croswell and her team at Duff & Phelps/Kinetic Partners, Christoph Koeppel, Jim Singh, Elaine Davis and Steve Bernstein for their comments, feedback and suggestions on various chapters of this book It is their priceless guidance and advice that made this book truly unique To the entire team at my publisher Palgrave Macmillan including Pete Baker, Aimee Dibbens, Nicole Tovstiga and Alexandra Morton for their incredible support during this journey This book would have never been possible Preface and Acknowledgements ix without their continuous support and backing And to Ben Simpfendorfer for his amazing advice and initial introduction to Palgrave, Mario Therrien for all his encouragement as well as Christopher Dillon for his very useful initial guidance on how to write a book! To Michael Wykoff for his amazing patience and fantastic proofreading and editing work and to my former student Agrata Gupta for her review of various parts of the book despite her full-time investment banking job Also, a big thank you to my former colleagues at UBS Investment Bank across Asia and globally where I had the chance to put a lot of my knowledge in action for many years and to everyone at Timothy Loh Solicitors who gave me my first opportunity in Hong Kong in this amazing industry To my grandfather who has been a role model of courage and foresight To my dad from whom I learned the values of hard work and integrity To my mom who taught me the importance of intellectual curiosity and giving back To my parents-in-law, for their understanding and support on all the days that I would be around them physically, but working on the book And, last but not least, to my amazing wife Lara Setrakian, for her patience and understanding for the late evenings, entire weekends and holidays that I was away from our family working on making this book a reality And to our amazing baby daughter Vera-Maria Arslanian, who was born during this journey and with whom I will spend more time now that this book is finished! And to you, dear reader, for your passion and interest in launching your fund Welcome to the world of entrepreneurship in finance! Henri Arslanian Adjunct Associate Professor The University of Hong Kong Contents Introduction and Overview of the Asian Hedge Funds Industry Introduction 1.1 What Is the Purpose of This Book? 1.2 Do I Need to Incorporate Everything That Is Set Out in  This Book? 1.3 What About Other Types of Asset Management Firms Like Long-Only Asset Managers, Private Equity, Venture Capital or Even Family Offices? 1.4 Does This Book Only Apply to Funds Being Launched in Asia? 1.5 How to Read This Book? Hedge Fund Industry Landscape in Asia Hedge Fund Ecosystem Starting a Hedge Fund in Asia Why Do You Want to Launch a Hedge Fund? What Are the First Decisions? 2.1 Where to Launch? 2.2 Should I Launch My Own Business or Join a Platform? Who Are Your Key Hires? 3.1 Chief Operating Officer 3.2 Broader Team 3.3 Organisational Chart How to Put Together a Business Plan and Budget? 4.1 Business Plan 4.2 Budget 1 2 2 9 10 10 11 14 14 15 15 17 17 18 xi xii Contents How to Raise Capital? How to Name My Business? 20 22 A Hedge Fund Startup Timetable and Budget Launch Timetable and Phases Budget 2.1 Introduction to Budgeting 2.2 Setting Up a Budget Spreadsheet 2.3 Fund Income and Expenses 2.4 Management Company Income and Expenses 2.5 Cash Flows Budget Template 3.1 What Does the Sample Budget Show? 25 25 29 29 30 31 32 35 35 37 Location: Where to Set Up Your Hedge Fund Business? Difference Between Management Company and Fund Management Company Location 2.1 Hong Kong and Singapore 2.2 China 2.3 Japan and Korea 2.4 Australia 2.5 United States and United Kingdom Fund Jurisdiction Choice 3.1 Cayman Islands and British Virgin Islands 3.2 Ireland, Luxembourg 3.3 Delaware 3.4 Mauritius 3.5 Hong Kong and Singapore 39 39 39 40 41 42 42 43 44 45 46 46 47 47 Regulatory Considerations: Do You Need a License? Regulatory Requirements 1.1 Do I Need a License? 1.2 Licensing Requirements in Hong Kong 1.3 Licensing Requirements in Singapore 1.4 Setting Up a Research Office in China 1.5 Impact of US Regulations on Asian Funds 49 49 49 52 65 70 73 Bibliography 247 “Final Rules and Interpretations”, Commodity Futures Trading Commission http:// www.cftc.gov/idc/groups/public/@newsroom/documents/file/fd_factsheet_final pdf GOV.UK https://www.gov.uk/how-to-register-a-trade-mark/register-a-trade-mark “Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies”, Monetary Authority of Singapore http://www.mas gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/ Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20 and%20Fund%20Management/IID%20Guidelines/SFA04G05Guidelines OnFMCLicensingAndRegistration7Aug2012.pdf “Guide to licence applications”, Securities and Futures Commission, last modified August 15, 2012 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Status%3Ainforce%20Depth%3A0;rec=0 248 Bibliography “Institutional Investor Survey  – 2015”, JP Morgan Chase https://www.managedfunds.org/wp-content/uploads/2015/02/JPM-Capital-Introduction-Group2015-Institutional-Investor-Survey.pdf “Inspection Report on the Soft Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds”, U.S.  Securities and Exchange Commission, September 22, 1998 https://www.sec.gov/news/studies/softdolr.htm “Introduction”, National Futures Association https://www.nfa.futures.org/NFAabout-nfa/index.HTML “Judgments”, Cayman Islands Judicial and Legal Information Website https://www judicial.ky/judgments “Licensing Information Booklet”, Section 1.2, Securities and Futures Commission http://www.sfc.hk/web/EN/pdf/regulatory-functions/licensing_information_ booklet_eng.pdf “Licence applications”, Securities and Futures Commission, last modified September 30, 2013 http://www.sfc.hk/web/EN/regulatory-functions/intermediaries/licensing/guide-to-licence-application/a.-licensed-corporation.html “Licence applications”, Securities and Futures Commission http://www.sfc.hk/web/ EN/regulatory-functions/intermediaries/licensing/guide-to-licence-application/ f.-applications-fees.html Monetary Authority of Singapore http://www.mas.gov.sg/About-MAS/Overview/ Groups-and-Departments.aspx “MAS Implements Enhanced Regulatory Regime for Fund Management Companies”, Monetary Authority of Singapore, last modified August 6, 2012 http://www.mas gov.sg/news-and-publications/media-releases/2012/mas-implements-enhancedregulatory-regime-for-fund-management-companies.aspx “Mission and Responsibilities”, Commodity Futures Trading Commission http:// www.cftc.gov/About/MissionResponsibilities/index.htm Mandatory Provident Fund Scheme Authority http://www.mpfa.org.hk/eng/main/ “National Futures Association: Swap Registration Requirements  – Proposed Amendments to NFA Bylaw 301 and Registration Rules 401 and 402”, National Futures Association, August 22, 2012 http://www.nfa.futures.org/news/PDF/ CFTC/Bylaw301_FR401_402SwapRegRequirements_082012.pdf “Open-ended Fund Companies”, Financial Services and the Treasury Bureau http:// www.fstb.gov.hk/fsb/ppr/consult/doc/ofc_conclu_e.pdf “Other topics relating to the SFO – FAQ”, Securities and Futures Commission, last modified December 18, 2015 http://www.sfc.hk/web/EN/faqs/intermediaries/ licensing/other-topics-relating-to-the-sfo.html#8 “Preqin Special Report: Asia-Pacific Hedge Funds March 2015”, Preqin https:// www.preqin.com/docs/reports/Preqin-Special-Report-Asia-Pacific-Hedge-FundsMarch-2015.pdf “People’s Republic of China Presidential Decree”, Xinhua News Agency, December 28, 2012 http://www.gov.cn/flfg/2012-12/28/content_2301532.htm Bibliography 249 “Profits Tax Information page”, Inland Revenue Department Hong Kong http:// www.ird.gov.hk/eng/tax/bus_pft.htm Property and Facility Management Division The Hong Kong Institute of Surveyors, March 15, 2010 http://www.hkis.org.hk/ufiles/PFM-OfficeMgtFee.pdf “Q & A – Final Rules and Interpretations” Commodity Futures Trading Commission http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/fd_qa_final pdf “Report of the Survey on Hedge Fund Activities of SFC-licensed Managers/Advisers March 2015”, Securities and Futures Commission http://www.sfc.hk/web/EN/ files/IS/publications/HF%20Survey%20Report%20EC%202015.pdf “Regulated Activities”, Securities and Futures Commission, last modified August 1, 2013 http://www.sfc.hk/web/EN/regulatory-functions/intermediaries/licensing/ guide-to-licence-application/regulated-activities.html “Response to feedback received – Consultation on review of the regulatory regime for Fund management companies and exempt financial Intermediaries”, Monetary Authority of Singapore http://www.mas.gov.sg/~/media/resource/publications/ consult_papers/2010/Response%20to%20policy%20consultation%20on%20 fund%20management%20regime_28Sept2010.ashx “Registration and Licensing”, Monetary Authority of Singapore http://www.mas gov.sg/regulations-and-financial-stability/regulations-guidance-and-licensing/ securities-futures-and-funds-management/registration-and-licensing-for-fundmanagement-companies.aspx “Regulation of Investment Advisers”, US Securities and Exchange Commission https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf State Administration for Industry and Commerce China http://www.saic.gov.cn/ sbjEnglish/ “SFC Licensing Booklet”, Section 5.7, Schedule 5, Part II, Securities and Futures Ordinance http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA9482 5755E0033E532/5167961DDC96C3B7482575EF001C7C2D/$FILE/ CAP_571_e_b5.pdf “SFC Adopts a Pragmatic Approach to Licensing Fund Managers”, Securities and Futures Commission, June 11, 2007 http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=H461 “Securities and futures (financial resources) rules” http://www.legislation.gov.hk/ blis_pdf.nsf/6799165D2FEE3FA94825755E0033E532/732A20EF6E20AF5D4 82575EF001D7822?OpenDocument&bt=0 “Securities and Futures Act”, Monetary Authority of Singapore http://www.mas.gov s g / ~ / m e d i a / M A S / Re g u l a t i o n s % a n d % Fi n a n c i a l % St a b i l i t y / Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20 and%20Fund%20Management/Regulations%20Guidance%20and%20 Licensing/Regulations/SFLCBReg.pdf 250 Bibliography “Statement of Guidance on Governance for Cayman Islands Registered Mutual Funds”, AIMA http://www.aima.org/objects_store/cima_final_statement_of_ guidance_on_corporate_governance_for_mutual_funds_-_summary_for_members.pdf Stephen Foley, “Getting to the bottom of hedge fund fees”, Financial Times, February 23, 2015 http://www.ft.com/intl/cms/s/0/1d0723cc-bb31-11e4-a31f00144feab7de.html#axzz3lSdZMvCv “Stamping procedures and explanatory notes”, Inland Revenue Department http:// www.ird.gov.hk/eng/pdf/irsd119.pdf “The Eurekahedge Report November 2012”, Eurekahedge http://www.thehedgefundjournal.com/sites/default/files/eurekahedge-singapore-nov-2012.pdf The United States Patent and Trademark Office http://www.uspto.gov/trademark “Tax Rates”, Inland Revenue Authority of Singapore https://www.iras.gov.sg/ irashome/Quick-Links/Tax-Rates/ “Tax Treatment of Foreign  – Sourced Income”, Ministry of Finance Singapore http://www.mof.gov.sg/Policies/Tax-Policies/Corporate-Income-Tax/ Tax-Treatment-of-Foreign-Sourced-Income “Toolbox – HFSB Standardised Board Agenda”, Hedge Fund Standard Board http:// www.hfsb.org/?page=12995 “User Guide – CeL eServices”, Monetary Authority of Singapore http://www.mas gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/ Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20 and%20Fund%20Management/IID%20Forms/User%20Guide%20%20 CeL%20eServices_6%20Jul%202015.pdf “UCITS  – Undertakings for the collective investment in transferable securities”, European Commission, last modified June 7, 2016 http://ec.europa.eu/finance/ investment/ucits-directive/index_en.htm Index A Accounting, 57, 61, 112, 115, 221 accounting firms, accounting systems, 146–7, 210, 212, 214 equalisation method, 146–7 fund accounting, 225–6 multi-series method, 146–7 Ahmad, Ayyaz, 183n Alternative Investment Fund Managers Directive (AIFMD), 46, 108, 154, 240 Altonaga, Jeb, 209n Assets under management (AUM) budgeting and expenses, 13, 19, 30, 33, 35–8, 181 capital raising, 159, 163, 164, 167 corporate websites, 191 estimating, funds of funds (FoF), 164 gates, 141–3 global hedge fund industry, governance, 126, 130 hedge fund industry in Asia, institutional investors, 67 institutionalising, 238–9, 240 licensing requirements, 67–9 management fees, 138 SEC method for calculating, 74n36 seeders, 159, 163 share classes, 139–40 Auditors, 65, 81, 87, 89, 124, 128, 153, 181, 226, 229, 230, 236 Audits, 116–19, 153–4 board of directors, 124–5, 128, 130 Cayman Islands and British Virgin Islands, 87, 89 fees, 19, 32, 34 Hong Kong, 81, 90, 112, 116 licensing, 68, 80, 81 NAV process, 226–7 Singapore, 81, 90 Australia, 4–5, 50, 109, 242 investors, 94, 172 management company location, 39, 42–3 Note: Page numbers in italics refer to figures and tables, page numbers followed by “n” refer to notes © The Author(s) 2016 H Arslanian, Entrepreneurship in Finance, DOI 10.1007/978-3-319-43913-6 251 252 Index Australian Securities and Investments Commission (ASIC), B Bank accounts, opening, 28–9, 72, 124, 129 British Virgin Islands audits, 87, 89 fund jurisdiction, 45–6, 85–6 governance and directors, 122 segregated portfolio company (SPC), 103 Brokerage commissions, 31 Budget and budgeting, 18–20, 25–38 budget template, 35–8 cash flows, 35 fund expenses, 19–20, 31–2 fund income and expenses, 31–5 fund income vs management company income, 30–1 management company income and expenses, 19–20, 33–5 office space, 196–8, 200, 202 sample hedge fund start-up budget, 37, 38 spreadsheet, 30–1 Business plans, 176, 189, 190 components of, 17–18 equity, 189 launch timetable, 25, 29, 30 licensing application, 61, 65 MAS application (Singapore), 70 office space, 195, 199, 202, 204 partner roles and responsibilities, 190 regulatory business plan, 17–18 SFC application (Hong Kong), 63–4 storytelling, 176 WFOE (China), 71 See also Budget and budgeting C Capital raising, 20–1 early stage investors, 21, 163–5 family and friends, 21, 162–3 family offices, 21, 162–3, 165, 168, 172–4 founder’s personal wealth, 21, 159 for fund, 162 fund marketing, 167, 170–81 funds of hedge funds (FoF), 164–5 high net worth investors/individuals (HNWI), 47, 49, 94, 136, 163, 165 importance of, 157–8 institutional investors, 166–7 for management company, 158–61 seeders, 21, 158–60, 168 strategy, 162–7 types of investors and funds invested, 168–9 Cayman Islands audits, 87, 89 fund jurisdiction, 45–6, 87–8 governance and directors, 122, 122–3, 127 segregated portfolio company (SPC), 103 transfer pricing, 111–13 Cayman Islands Monetary Authority (CIMA), 89, 123 Chief Financial Officer (CFO), 14, 67, 187, 191, 238 position description, 16 Chief Investment Officer (CIO) as board member, 124, 130 capital raising, 170–1 as Chief Risk Officer (CRO), 17 choosing Chief Operating Officer (COO), 184–5 equity, 186–9 institutionalisation, 238, 238–9 investor relations, 240 key hires, 14 Index key person provisions, 144 management company vs fund, 40 position description, 17 as responsible officer (RO), 55 salary, 19 trade workflow, 211–12 Chief Marketing Officer (CMO), 17 Chief Operating Officer (COO), 26, 155, 170, 191 as board member, 124, 130 cash management, 223–4 choosing and hiring, 14–16, 19, 184–5 counterparty management, 224 equity, 14, 186–9 institutionalisation, 238, 238 operations, 220–1 position description, 16 as responsible officer (RO), 55 salary, 19, 36, 185–6 service providers, 229, 233 specialists, 16, 184 Chief Risk Officer (CRO), 17, 238 Chief Technology Officer (CTO), 14, 17, 238 China Asset Management Association of China (AMAC), 50, 71 China-Hong Kong Mutual Recognition, 90, 109 China Securities Regulatory Commission (CSRC), 71, 109 fund structuring, 90 hedge fund industry landscape in Asia, investors, 172 launch location, 10 management company location, 39, 41–2 regulation and licensing, 49, 58, 70–2 research office, 70–2 Securities Investment Funds Law, 70 253 trademarks, 24 transfer pricing, 111–13 wholly foreign-owned enterprise (WFOE), 41, 71–2, 112, 113 Close-ended fund, 90, 91 Commodity Futures Trading Commission (CFTC), 50, 73, 75–80, 79n48, 83 de minimis exemption, 77–9, 79n47, 83 Commodity Pool Operator (CPO), 76, 77n40, 80, 81n49, 83 Compliance firm, 62, 63, 80, 240 Credit default swap (CDS), 76, 79, 79n47, 225 D Directors’ fees, 31, 130, 226 Dodd-Frank Wall Street Reform and Consumer Protection Act, 73, 75, 240 E Equity long/short strategies, 5, 10–11, 36, 135, 136, 217, 227 Equity ownership, 186–8 F Family offices, 2, 47, 86, 91, 92, 94, 95, 136 capital raising, 21, 162–3, 165, 168, 172–4 institutionalising, 239 licensing exemptions, 53 Financial crisis of 2008, 4–5, 18, 49, 76, 122, 141, 143, 151, 165, 218, 244 Financial technology (fintech) industry, 179, 219, 239 254 Index First decisions budget, 18–20 business name, 22–3 capital, 20–1 independent funds vs platforms, 11–14 key hires, 14–17 location, 10 logo, 23 trademarks, 24 website, 23 Fund administrators agreement, 110, 128 annual audit, 226 areas of focus, 235–6 budget and expenses, 20, 31–5, 147 business plan, 65 capital raising, 181 equalisation vs share series, 146–7 fund accounting, 225–6 fund structuring, 87 governance, 124, 129–30 investor reporting, 227 management company vs fund, 40 operational due diligence, 153 outsourcing operations, 220–1 provider engagement, 230 regulation, 82 selection, 27 systems, 210, 212, 215, 216 Fund management companies (FMC), 66–9 Accredited/Institutional Licensed Fund Management Companies (A/I LFMC), 50, 66, 67–9 budgeting, 30–35 capital raising for, 158–61 equity ownership, 186–9 expenses, 19–20, 147–8 governance and directors, 122, 122, 124–5, 129, 131, 170 legal documentation, 153 location, 39–44 management company structuring in Asia, 114–20 management company vs fund, 39 naming and trademarks, 24 Registered Fund Management Companies (RFMC), 50, 66, 67–9 regulation and licensing, 50–1, 66 service providers, 229, 231, 234, 236 Fund marketing elevator pitch, 175–6 face-to-face meetings, 180 five Ps of, 167, 170–81 industry events, 180 people, 170–1 place, 171, 175 presentation materials, 177–8 price, 167, 170 product, 167, 170 promotion, 80 social media and networking, 179 storytelling, 176 website, 178 Fund structuring, 85–110 alternative structures, 103–8 Cayman Islands and British Virgin Islands, 87–8 comparison of Asian retail initiatives, 109 comparison of Cayman Islands and British Virgin Islands, 89 comparison of Hong Kong and Singapore, 90 Hong Kong and Singapore, 88–90 initial considerations, 90–4 jurisdiction choice, 85–90 legal documents, 108, 109–10 location of investors, 92 managed account/fund of one vs traditional fund, 105 managed accounts and funds of one, 103–5 master-feeder, 98 Index one-legged master-feeder, 96–7 retail fund structures, 106–8 segregated portfolio company (SPC), 103 stand-alone fund, 95–6 tax structuring considerations, 99–102 traditional fund structures, 95–8 type of fund structure decision chart, 92 U.S investor comparison, 94 U.S investors, 92–4 Fund terms common fund strategies, 134–5 competitive fee landscape, 137 currency, 137 equalisation vs share series, 146–7 fund expenses, 147–8 fund fee examples, 140 fund strategy, 134 gates, fund-level and investor-level, 141–3, 150, 151 high-water mark (HWM), 31, 139, 144–5 key person provisions, 144 locks, soft and hard, 140–1 management and performance fees, 138–9 operational due diligence, 151–5 portfolio limits, 150–1 share classes, 133–7 side letters, 150 side pockets, 143–4 soft dollars, 149 target investors, 136–7 underlying portfolio liquidity, 135–6 G General Anti-Avoidance Rules (GAAR), 47 General Counsel (GC), 14, 16, 184, 187, 238 255 Governance, 121–31 board meetings, 128–31 common board selection mistakes, 127 institutional investor requirements and expectations, 122–3, 127 questions for potential board members, 126 role of boards, 124–5 selection of boards, 125–7 tax considerations for board composition, 121–2 H Headhunters See Recruiters Head of Investor Relations, 17 Hedge fund industry, 1–7 in Asia, 4–6 AUM estimates, capital raising, 157–81 fund structuring, 85–110 fund terms and due diligence, 133–55 governance, 121–31 growth in Hong Kong, location, 39–48 office space, 195–208 reasons for starting a hedge fund in Asia, regulation, 49–83 service provider selection, onboarding and growth, 229–42 starting a fund in Asia, 9–24 start-up timetable and budget, 25–38 talent and hiring, 183–93 tax and management company structuring, 111–20 technology, systems and operations, 209–27 256 Index High net worth investors/individuals (HNWI), 47, 49, 94, 136, 163, 165 High-water mark (HWM), 31, 139, 144–5 example of practical differences between traditional and modified HWMs, 145 Hiring See Talent and hiring Hong Kong audits, 81, 90, 113, 116 bank accounts, 28 capital raising, 171, 172, 175 central management and control principle, 101–2 fund jurisdiction, 44, 47–8 fund structuring, 88–90 governance and directors, 122, 122 Inland Revenue Department (IRD), 99, 101–2, 112, 116 launch location, 10 management company location, 40–1 Mutual Recognition retail initiative, 109 office space, 28, 34, 197, 197, 202, 205–8 offshore tax exemption, 99–100 regulation and licensing, 27, 49, 50, 52–65, 71, 81, 240 soft dollars, 149 staff benefits, 186 tax rate, 11 territorial tax principles, 113–14 trademarks, 24, 24n5 transfer pricing, 111–13 types of investors, 172 undertakings for the collective investment in transferable securities (UCITS), 106 Hong Kong Securities and Futures Commission (SFC), 89, 109 hedge fund AUM estimates, regulation, 49, 50, 52–64, 80 Hong Kong Securities Institute (HKSI), 51, 58–9 Hong Kong Society of Financial Analysts, 242 Hurdle rates, 139 I India, 41, 47, 79, 90 Investment Advisers Act of 1940, 73 Ireland, 46, 85, 88 J Japan, 109, 178 hedge fund industry landscape in Asia, investors, 94, 172 management company location, 39, 42 Job descriptions, 15, 191, 196 K Korea See South Korea L Launch timetable, 25–9 example, 26 Law firms, 6, 19, 32, 62, 64, 86, 87, 124, 181, 236 Legal costs, 31, 32, 36, 98 Licensed corporation, 55–6, 61, 81 Licensed representatives, 55, 61–3, 81 Long-only asset managers, Luxembourg, 46, 85, 88 M Market data, 20, 37, 113, 147, 211, 215 Index Marketing See Fund marketing Mauritius, 47 Monetary Authority of Singapore (MAS), fund management incentive scheme, 120 regulation, 49–50, 53, 66, 70, 82 tax concessions, 117–18 N Nardella, Michael, 195n National Futures Association (NFA), 75, 79–80, 83 Net asset value (NAV), 32, 40, 107, 122–3, 130, 142–6, 150, 154, 210, 225–7, 235, 241 Net notional value, 77–9, 79n47 Nilsson, Stefan, 157n O Office space access and image, 198 air conditioning, 199 approximate costs of office rental, 197 budget and operational costs, 197–8 Core business considerations, 196 core business district (CBD), 198 effective rent, 206 fit-out considerations, 202 fit-out costs, 202 grades of office space, 197–8 lease deal and key clauses, 204–8 leasing process, 199–202 maximising lease value, 202–8 mechanical and engineering (M&E) requirements, 198–9 property brief, 199–200 pros and cons of using a real estate agent, 201 real estate agents, 201 257 real estate timeline, 203 rent deposits, 207 serviced office, 200–1 service office vs conventional office decision chart, 200 space needed and location, 196–7 space needed per number of people, 196 Offshore derivative instruments (ODI), 47 Open-ended fund, 47n3, 90, 91, 94 Operational due diligence (ODD), 151–5 areas of focus, 153–4 defined, 151 timeline, 152 Operations, 219–22 building an operations framework, 222–7 operations framework, 222–7 outsourcing operations, 220–1 service providers, 6, 243 Organisational charts, 14–18, 64, 70 example of hedge fund organisational chart, 16 Organisation for Economic Co-operation and Development (OECD), 111 P Pension funds, 33, 42, 166–7, 169, 172–4, 239, 240 Platforms costs, 11, 19 joining established platform, 13–14 launching one’s own fund vs, 12 types of investors, 168 using an independent platform, 12–13 Prime brokerage agreement, 110, 128, 144 258 Index Prime brokers areas of focus, 235 capital raising, 162 due diligence, 151, 232 fees, 20, 32, 36 and fund administrator, 235 fund expenses, 147–8 and fund manager, 82 fund marketing, 170–1 governance, 124, 128, 129 investor relations, 180 launch timetable, 27, 28 meeting with, 232 operations framework, 223–4 soft dollars, 149 and third party agents, 34, 181 trade workflow, 212 Private equity (PE), 2, 3, 46, 47, 59, 74n36, 85, 88, 89, 91, 99, 139 Private placement memorandum (PPM), 27, 31, 36, 125, 128, 129, 150–1, 178, 226 Q Qualified election fund (QEF), 93 R Recruiters, 192–3 Regulation application process time, 61–2 Commodity Futures Trading Commission (CFTC), 75–80, 83 compliance requirements and U.S regulations, 82 compliance requirements in Hong Kong, 81 compliance requirements in Singapore, 82 Foreign Private Adviser Exemption, 73–4 Hong Kong and Singapore comparison, 50–1 impact of U.S regulations on Asian funds, 73–80 jurisdiction, 50 licensing in China, 70–2 licensing in Hong Kong, 52–65 licensing in Singapore, 65–70 Private Fund Adviser Exemption, 74 requirements, 49–80 Securities and Exchange Commission (SEC), 73–5, 82 self-preparation vs law firm or compliance provider, 62 Relevant industry experience, 51, 58–9, 61 Research office, 41, 44, 53, 70–2, 113 Responsible officers (RO), 18, 36, 51, 55, 57–61, 64, 191 Retail initiatives, Asian, 108 S Securities and Exchange Commission (SEC), 50, 73–6, 74n36, 80, 82, 104 Securities and Futures Commission See Hong Kong Securities and Futures Commission (SFC) Segregated portfolio company (SPC), 103 Service provider ecosystem, 6, 10, 39, 42, 45, 86, 87, 89, 232 Service provider selection areas of focus, 235–7 auditors, 236 balancing cost and quality, 29 compliance and regulatory, 240 compliance providers, 236 cyber security, 237 data security, 237 final selection and onboarding, 234 Index finding relevant service providers, 232 fund administrator, 235–6 industry groups, 242 initial planning, 231 institutionalising the business, 237–40 insurance firms, 236 investor relations, 240, 241 law firms, 236 meeting and diligence, 231–4 phase 1, 26, 230 phase 2, 27, 230, 230–7 phase 3, 28, 230, 230–7 prime broker, 235 ranking providers, 233 tax advisers, 236 technology providers/vendors, 237 timing and stages, 229–34 timing of engagement with providers, 230 Share classes, 133–7 Singapore Accounting and Corporate Regulatory Authority (ACRA), 70 ASEAN Framework retail initiative, 109 Asia Region Funds Passport retail initiative, 109 audits, 81, 90 bank accounts, 28 capital raising, 171, 172, 175 central management and control principle, 101–2 fund jurisdiction, 47–8 fund structuring, 88–90 governance and directors, 122, 122 India-Singapore double tax treaty, 47 launch location, 10 management company location, 40–1 management company structure, 114 259 office space, 26, 34, 197, 197, 202, 205–8 offshore tax exemption, 99–100 regulation and licensing, 26, 49, 50, 52–65, 67–9, 81–2 soft dollars, 149 staff benefits, 186 tax rate, 11 territorial tax principles, 113–14 trademarks, 24, 24n5 types of investors, 172 undertakings for the collective investment in transferable securities (UCITS), 107 See also Monetary Authority of Singapore (MAS)) South Korea, 109 investors, 172 management company location, 39, 42 Sovereign wealth funds (SWF), 133, 166, 172, 174 Stephenson, Anna, 25 Substantial shareholder, 57, 62, 65, 81 Swaps, 75, 78–9 credit default swap (CDS), 76, 79, 79n47, 217 Systems customer relationship management (CRM), 211, 214 execution management system (EMS), 28, 34, 210, 212, 214, 215, 225, 239 order management system (OMS), 28, 34, 37, 210, 212, 214, 215, 225, 239 portfolio management system (PMS), 28, 34, 37, 210, 212, 214, 215, 239 research management system, 211 risk management system (RMS), 28, 211, 214 See also Technology and systems 260 Index T Talent and hiring choosing COO, 184–5 core team, 190–1 equity, 186–9 equity vs shadow equity, 188–9 finding good people, 191 hiring mindset and approach, 183–4 recruiters, 192–3 salaries, 185–6 traditional ownership structures, 186–8 use of titles, 191 Taxes cost-plus methodology, 112 fund structuring, 87–102 governance and directors, 121–2, 125–6, 139 India-Singapore double tax treaty, 47 office space, 196, 197, 205, 207–8 offshore tax exemption, 99–100 passive foreign investment company (PFIC), 93, 94 profit-split methodology, 112–13 tax advisors, 19, 39, 87, 113, 114, 122, 229, 230, 236 tax rates, 11, 51, 51 territorial tax principles, 113–14 transfer pricing, 111–13 unrelated business taxable income (UBTI), 93, 94 U.S investors, 92–4, 96 Technology and systems budget and expense, 19, 33–4, 37 building one’s own systems, 214 Chief Technology Officer (CTO), 14, 17, 238 common fund systems, 214 company smartphones vs BYOD, 215 and COO, 16, 184 cybersecurity, 218–19 financial technology (fintech) industry, 179, 219, 239 hardware considerations, 215–16 and human factor, 180 main fund system components, 210–11 outsourcing, 213–19 risk management, 218 servers vs cloud-based services, 216 straight-through processing (STP), 216 technology and systems considerations, 210–14 trade workflow and related systems, 211–12 vendor selection and due diligence, 216–18 Titles, use of, 16 U Undertakings for the collective investment in transferable securities (UCITS), 46, 106–7, 241 United Kingdom British Overseas Territories, 87 investors, 171, 172 management company location, 43–4 trademarks, 24 United States, Commodity Futures Trading Commission (CFTC), 50, 73, 75–80, 79n48, 83 Delaware, 46, 85, 88 impact of U.S regulations on Asian funds, 73–80, 82 investors, 50, 62, 92–4, 96, 139, 146, 173–4, 175 Index management company location, 43–4 Securities and Exchange Commission (SEC), 50, 73–6, 74n36, 80, 82, 104 trademarks, 24 261 U.S person, 74, 75 V Venture capital (VC), 2, 3, 47, 88, 139 .. .Entrepreneurship in Finance Henri Arslanian Entrepreneurship in Finance Successfully Launching and Managing a Hedge Fund in Asia Henri Arslanian Adjunct Associate... School of Economics and Finance where he teaches graduate courses in the Master of Finance programme on Entrepreneurship in Finance as well as the first FinTech course in Asia He also teaches... http://www3.weforum.org/docs/WEF_Alternative_Investments_2020_An_Introduction_to_AI.pdf © The Author(s) 2016 H Arslanian, Entrepreneurship in Finance, DOI 10.1007/978-3-319-43913-6_1 Entrepreneurship in Finance 1.1 What