Types of investment funds in Singapore
As mentioned in an earlier article about wealth management, Singapore has a very developed capital market and ecosystem – one of the 7 reasons this city state is ranked 2nd in the world as the preferred offshore wealth hub. It is now the 3rd largest financial exchange centre in the world and could be overtaking Hong Kong due to the political and financial stability offered here.
Further supported by the attractive benefits offered by the Variable Capital Company (VCC) framework, more funds are now looking to be domiciled in Singapore. In addition to that, the Monetary Authorities of Singapore encourages and provides conducive platforms for innovative financial products to be tested safely and realised in a live market, i.e. the Sandbox and Sandbox Express.
It is therefore not surprising that the variety of investment funds in Singapore is vast compared with its ASEAN and Pan-Asian neighbours. This article provides a structured explanation of all the different types of investment funds available in the country.
What is an Investment Fund?
First of all, let us discuss its definition. It is a pool of funds from many investors used to collectively purchase assets. Each investor retains ownership and control of his own shares but the fund is managed by a fund manager.
An investment fund provides a broader selection of investment opportunities, greater management expertise, and lower investment fees than what investors might be able to obtain on their own. Investors do not make decisions about how a fund’s assets should be invested. They simply choose a fund based on its objectives, risk, fees and other factors.
Types of Investment Funds
Here are the types classified based on legal form, capitalization, asset class, investment strategy and management style. Click on the links to read about each type.
- Unit Trust / Mutual Fund
- Hedge Fund
- Private Fund
- Public Fund and ETF
- Bond Fund (fixed income)
- Stock Fund (public equity)
- Private Equity Fund
- Money Market Fund
- Real Estate Fund
- Commodities Fund
- Forex (multi currencies) Fund / Foreign Currency Denominated Fund
- Crypto Currencies & Tokens Fund
- Tokenized Securities Fund
- Hybrid Fund
- Passively managed – Index Fund
- Actively managed
- Quant Fund
- Algo Fund
- AI Fund
Funds by Legal Structure
Unit trusts or mutual funds are highly regulated as they are open-ended, i.e. available to the public and can be advertised to the public. Hedge funds, on the other hand, are usually close-ended, meaning they are private funds. This means they are less regulated and only offered to accredited investors.
Obligation to disclose holdings is therefore compulsory for unit trusts but not for hedge funds. Strategies for hedge funds are more flexible than unit trusts, but they may be less liquid. Hedge funds tend to have a more complicated legal structure that most mutual funds don’t.
With regards to fees, most unit trust managers charge investors an annual management fee of 0.5% to 3% of the total funds under management. Sometimes there are also entry fees, exit fees or both at around 3% each.
Hedge funds typically charge an annual management fee of around 2% of assets under management, as well as a performance fee (or carry) of around 20% +/- of the profits or the returns of the fund.
These are a few of the key differences for these two types of investment funds.
Unit trust / Mutual fund
In short, it is an investment structure which allows funds to hold assets and provide profits directly to the unit owners or beneficiaries. Most unit trusts are highly regulated and open to regular investors.
Click here for a comprehensive explanation on unit trusts.
It is a pool of funds from accredited investors which is used to carry out a mix of long-short and other strategies that are not possible via the unit trust structure. The asset classes in hedge funds can literally be anything, from land to real estate, stocks, derivatives or currencies.
Funds By Capitalization
This type of fund is not listed on any exchange. Owners of the shares who wish to sell their shares can only do so in a secondary market.
This is a unique private fund which makes use of blockchain technologies. It provides liquidity to its investors by having its own Tokenized Securities Offering (TSO) and avoids the capital intensive process of going public via an IPO. Investors in the fund can trade their equity shares anytime on a centralized or decentralized crypto exchange.
Public Fund and ETF
A public fund is one that can be listed on an exchange and owners of its shares can trade those shares publicly. Trading can only be done at the end of a trading day, and usually via a broker.
A special type of mutual fund called ETF (exchange traded fund) invests in a basket of stocks (usually an index). It can be traded on an exchange at any time like any other stock. Most ETFs are transparent when it comes to their holdings.
Funds by Asset Class
Any of these fund types can be a mutual or hedge, private or public, open or closed-ended.
Money market fund
It is a kind of unit trust that invests in highly liquid near-term instruments with low-level risk. The instruments invested include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity. A money market fund is sponsored by an investment fund company so it offers no guarantee of principal.
Bond fund (or fixed income funds)
Also called a debt fund, it invests primarily in either public and private bonds as well as other debt instruments such as mortgage-backed securities (MBS). Its main objective is to generate regular income for investors.
Public equity fund (or stock funds or simply equity funds)
It is a source of financing generated from selling a company to the public via an initial public offering (IPO).
Private equity fund
Used by high-networth investors, it is a closed-end fund which is considered an alternative investment class. Because it is a private fund, it is not listed on a public exchange. It allows direct investments and acquisition of equity in privately held companies.
Real estate fund
It is a type of unit trust that primarily focuses on investing in securities offered by public real estate companies, including REITs (real estate investment trusts).
It has direct holdings in actual commodities, commodity futures or commodity-linked derivative instruments. A variety of formats and investment strategies can be employed, including active management and passive management.
Also known as Forex, foreign exchange or FX fund, it may rely on macroeconomic indicators or technical analysis to trade FXspot, forwards, swaps or futures.
Utility token / Cryptocurrency fund
Examples of tokenized digital assets are Bitcoin, Litecoin and Dash. The tokenization of money gave rise to a new type of asset that could be both securities and virtual currencies. This is the Utility Token, which basically represents a utility when using a specific decentralized product or service. For example, Ether coins to access Ethereum’s computing platform. A utility token fund then invests in this type of asset, e.g. Ether coins.
It is a unit trust or ETF that invests in more than one type of security like both stocks and bonds. It allows investors to own a mix of different asset classes existing in at least two other funds by investing in one single fund.
Fund of Funds
Often established by the foundations of universities, nonprofit organizations, churches and hospitals, it is an investment fund structured for organizations to make consistent withdrawals from the invested capital. The capital is generally utilized for specific needs or to further an organisation’s operations. Funds are often entirely by donations.
In Singapore, this would be the CPF (Central Provident Fund) – a pool of money contributed by employers for their staff. Earnings on investments by the pension fund generate income for the workers upon retirement.
Funds by Management Style
A passively managed fund has a portfolio constructed to match the components of a market index. The perfect example is the index fund. An index is a sample portfolio of stocks in a public market to track the performance of the overall market, such as the S&P500. Some indices track specific industries.
On the other hand, actively managed funds need skilled analysts and portfolio managers to select assets to invest in, and decide when to enter or exit an investment position. The aim is to beat the index. Examples are venture capital funds and hedge funds.
A type of actively managed fund, quantitative funds select securities using advanced quantitative analysis. Its managers build customized models using software programs to determine the fund’s investments or portfolio construction.
Algorithmic funds are also active funds that have automated their trading via software. The software follows a defined set of instructions (an algorithm) for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. High frequency trading is synonymous with algorithmic funds but in reality it is just a small subset in the universe of algorithmic trading strategies.
Artificial Intelligence (AI) Funds are powered by artificial intelligence models which analyze assets and predict prices. Examples are AI-crypto funds, AI-mutual funds, AI-ETFs and AI-hedge funds.
As the world of information technology expands, trading and investing will be revolutionized and more types of funds will emerge. The most recent examples are the AI-driven fund and algo fund. In time, these might overtake the traditional and manually managed funds as the latter lose their competitive edge.
Salzworth Global Currency Fund
Ashli manages the Global Currency Fund with her FX team at Salzworth Asset Management. Prior to the Fund’s setup, she was managing a FX trading prop desk and has served as the COO for a FX brokerage. Ashli started her career in investment banking in Bank of America Merrill Lynch in Singapore and ANZ Bank in Hong Kong. With her wealth of experience, Ashli is focused on developing the Fund to deliver quality and sustainable alpha for her investors.