Hedge funds, Singapore and why Tokyo is hollowing out (again) [corrected] | FT Alphaville

Hedge funds, Singapore and why Tokyo is hollowing out (again) [corrected]

Update: Goldman called us on Tuesday to correct a few key facts about its annual Tokyo gabfest, held last week. Our report below was based on attendance at some speaker sessions and a social gathering. See below

It almost looked like old times at the Goldman Sachs annual Tokyo hedge fund conference this week. Almost, but not quite. The venue was the same as it has been for years: the swank Four Seasons Chinzan-so in the city’s north.

But instead of occupying the tasteful function rooms of the main hotel, the gabfest had been moved into the (much smaller, and cheaper to rent) wedding hall nearby. [Goldman says the cost of renting the wedding hall was almost identical to the main hotel premises, and that cost was not a consideration; the rooms in the new premises were “more spacious“, it said]. And instead of the 400-500 participants who turned out last year (itself a significantly lower number than in the early 200s heydays), this year’s roll-up barely topped 200 people. [That was apparently for a couple of the speaker sessions and at various times of day. In fact, says Goldman, total attendance over two days amounted to 520 people, a little higher than last year].

Instead of Japan and its — err, so-called ‘investment opportunities’, the theme of the day was (guess what) China. [Goldman says the theme of the conference has never been exclusively Japan. But even Goldman admits that China has become the topic de jour, at investment conferences around the world] And — in the most revealing sign of new austerity — the duration of the annual gathering had been cut from three days to two. [This is where we begin splitting hairs. The conference has always been two days, says Goldman – it’s just that previously, a third optional day was offered for talks by some of its own strategists and others. This year that was all compressed into two days].

At a drinks gathering held during the week to farewell a western banker moving from Tokyo to Singapore, it became apparent that nearly a quarter of the investment bankers, hedgies and analysts present were about to or already had moved from Tokyo to Singapore or Hong Kong.

In fact, as evident in everything from growing vacancies among expat apartments in central Tokyo and the recent slide in enrolments at the city’s international schools, Japan is in the throes of Phase II of a ‘double-dip’ expat finance industry exodus.

Having built back up from a mass exit of foreign financial types after the height of the financial crisis in 2008, foreign financial institutions are again shifting staff out — at the same time that hedgies, consultants and financial support service companies are also fleeing to lower-tax environs. The key beneficiaries, once again, are Singapore and Hong Kong, with their ultra-low tax rates and in Singapore’s case — savvy marketing to attract foreign financial firms.

One conversation overheard in a quiet corner at this week’s gathering summed up the mood of the times:

Man A (who is running his own emerging markets hedge fund): I have to move to Singapore (screwing up face): Hate the place. But it’s just getting too expensive in Tokyo, I mean — Singapore at 15 per cent tax, a no-brainer. We’re paying much more than double that here [in Tokyo].

Man B (who left an investment banking job in Tokyo to move to Singapore and set up his own Asia-focused hedge fund): Singapore’s not that bad, actually. And you can have as many maids and nannies as you want there.

Man A: Bah. Nothing to do but shop and eat. Boring. And hell, I can afford as many staff as I want here in Tokyo. But Australia – now there’s a place to live.

Man B: But what about taxes — they’re too high, no?

Man A: Are you kidding? I had my accountants look into it and they worked out a 29 per cent tax rate for me., I was all set to move. And then the Australians tell me I have to put down $750,000 and tie it up for three years to get the visa. I mean, the fund’s doing well but not that well that I want to do that.

Man B: Well you don’t get that in Singapore. Or Hong Kong.

Man A: Yeah… but actually, you know what. I don’t want to move anywhere. My family loves Tokyo — and I love the food. But Christ, this tax is just killing us.

Man B: Just do what I do, come back all the time but make sure you don’t go over six months here, and you don’t pay any tax.

Man A: Oh don’t you worry about that, we’re keeping our mountain house here. And the beach house.

And you’ll feel even, erm, sorrier for these high-flying “tax refugees” after reading about one small — but potentially chilling — threat to Singapore’s low-tax, light regulation regime.

As Reuters reported earlier this week, the EU’s move to pass tough new regulations for hedge funds and private equity firms may force Singapore, Hong Kong and other financial centres in Asia to bring their regulatory regimes more in line with the new European rules.

Not only that. The EU’ Alternative Investment Fund Managers Directive, which is now before the European Parliament, will apply to all fund managers with EU-based clients, regardless of where they are domiciled.

Notes the report:

That means Asian hedge fund and private equity managers, which previously enjoyed broader regulatory freedom than their Western counterparts, may get roped into the reforms.

While Singapore and Hong Kong are home to a growing Asia-focused alternative investment industry, it’s estimated that around 50 percent of their investor base comes from Europe. It’s the connection with European investors that could make them subject to strict new rules on pay and leverage.

As of July this year, funds in Hong Kong and Singapore had assets of $45.4bn, according to Singapore-based consultancy Eurekahedge, just 2.7 per cent of the $1,700bn industry total. But, of course, that percentage hasd been growing.

And now, it would seem, there are fewer and fewer places to hide.

Do we feel sorry? Perhaps for Tokyo and its fading ambitions to be an Asian financial centre…

Related links:
Hedgies are better off in Asia, or are they? – FT Alphaville
Goldman de-glitzes Tokyo fest for Asia hedgies – FTAlphaville
CLSA revives Tokyo’s ‘high-touch town’ – FT Alphaville
Sayonara HSBC – FT Alphaville