Nepal Hill Nice But Lower Taxes & Innovative Hedging Instruments Even Nicer

"The solution is to gradually become free of societal rewards and learn how to substitute for them rewards that are under one's own powers. This is not to say that we should abandon every goal endorsed by society ; rather, it means that, in addition to or instead of the goals others use to bribe us with, we develop a set of our own."

Mihaly Csikszentmihalyi, author, The Psychology of Optimal Experience (1990 - )

A co-ordinated publicity campaign to attract hedge funds to Singapore has taken another step forward. While news that a former enclave of currently empty buildings in an area known as Nepal Hill is waiting for new hedge fund tenants, there is no guarantee that it will be successful.

It is interesting to take a closer look at the hedge fund "enclave" at Two Greenwich Plaza which was originally housed by small shippers, manufacturers and lawyers. Back in 2005 this was one of the most desirable locations for single managers, CTAs, hedge fund of fund firms and other service providers such that an estimated $20 billion in assets were controlled from that building.

Greenwich sits close to the Long Island Sound with a number of private beach communities, the Indian Harbor Yacht Club and spacious country homes, in addition to high quality private schools. This, plus the fact that CT state taxes are lower than those in NY made it an attractive option for growing hedge fund managers that was close enough for city meetings but far enough away to escape the pressures and high costs of Manhattan apartment living.

Fast forward to 2009. Almost 80% of commercially-leased space in the Greenwich enclave and its immediate surroundings comes from financial firms with a big, big part of that directly connected to the hedge fund industry. This over-dependence has seen a fallout as the industry has fallen out of bed. Firms have collapsed, shut down and left altogether. Rents have fallen and the resulting office space has been divided up to accommodate a smaller, more diverse tenant profile.

The better bet for Singapore would be to work on improving the corporate and personal income tax regime to enhance not only the hedge fund but also private equity and venture capital environment. At the end of the day, rather than looking to encourage managers to arbitrage between locations and jurisdictions for the short-term "fix" in Asia, the real long term solutions are likely housed in encouraging new fund formation, finding the "Singaporian George Soros" of tomorrow and getting more institutional investors involved in backing emerging managers.

Managers will move to Singapore if they know that big allocators, family offices, endowments, pensions, insurers and the like are there too looking for investment opportunities.

On another not unrelated note, still a lot more can be done to improve the availability and depth of Asian exchanges as well as the types and numbers of derivatives. For example, the development of greater activity in an Asian fixed income market would be a huge step in the right direction as well as greater co-operation with western exchanges like the CME in order to increase the number and depth of instruments that can be traded in Singapore and other locations.

At the end of the day, the long term success of Singapore to develop its status as the Geneva of the East relies on unleashing an entrepreneurial spirit and drive in its manpower. In this regard it has a fight on its hands with Hong Kong. Remember too that Greenwich is also the place where LTCM, Amaranth and many other funds blew up. In fact, one could argue that in this post-credit crisis example there is a movement for new clusters to move out of the large metro centers into cheaper areas where cost of living including rents are now significantly lower. So the takeaway from this is be careful who/what you look up to if you want to avoid similar pitfalls. Mahalo.