Singapore MAS Assistant Managing Director Gillian Tan Speech at AIMA Singapore Annual Forum 2024: Over 200 AIMA Members in Singapore, Over 250 Alternative & Hedge Fund Managers in Singapore, New Private Credit & Alternative Managers Include Apollo, Blackstone, HPS & Oaktree, Global Hedge Funds AUM Increased to $4.4 Trillion & Private Credit Funds AUM Increased to $151.9 Billion in 2023 Q3, 3 Mega Forces Net Zero Transition, Digitalisation & Generative AI

Jack Inglis, CEO, AIMA
Michael Bugel, Managing Director, Co-head of APAC, AIMA
Lee Kher Sheng, Managing Director, Co-head of APAC and Deputy Global Head of Government Affairs, AIMA
Distinguished guests
Ladies and gentlemen

Thank you for inviting me to speak with you today at the AIMA Singapore Annual Forum. The Forum provides an invaluable opportunity for us to share insights and reflections, and it is good to see many representatives from across the alternatives asset management sector who are present here today.

This year is truly special as it marks the 20th anniversary of AIMA in Singapore and this is also the 10th edition of the annual forum held here. I would like to congratulate AIMA on this significant milestone. It has been remarkable to see AIMA’s membership in Singapore grow from strength to strength since AIMA was first set up in 2004. I understand that you now have a membership base of over 200 member firms.

AIMA’s deep commitment to grow the industry and keep your members updated on key developments is evident from the number of AIMA events organised in Singapore, which has almost doubled since before COVID. We also value AIMA’s role as the global voice of the alternative investment industry, and for the thought leadership and industry guidance you provide on a range of issues, including responsible investment, digital assets, private credit and artificial intelligence (“AI”).

Cautious Optimism While Headwinds Remain

Looking back, the year that has just gone by was not without its challenges. Geopolitical tensions and supply chain disruptions due to on-going wars, inflation risks, higher for longer interest rates as well as cost pressures have caused uncertainty to the financial markets. That said, global financial markets confounded gloomy expectations last year, rebounding from a challenging year in 2022. Global equities rallied by more than 22% in 2023. ^[1] Notably, the US S&P 500 Index gained over 24%, notching up a record high. ^[2] The US stock market rally was impressive but lopsided, led by the “Magnificent Seven” ^[3] and fueled by strong anticipated growth in the AI space. Global bonds also reversed heavy losses made early in the year, as recession fears were replaced by growing confidence that the US would achieve an economic soft landing. ^[4]

As we move into 2024, while macroeconomic headwinds have not fully subsided and the asset management industry continues to face cost pressures and increased competition, the market is turning cautiously optimistic. Global inflation appears to have eased from its highest level and progress is underway to bring inflation down to target. ^[5] Zooming in, Asia remains a highly dynamic region, with a projected growth rate of 4.5% in 2024, contributing to two-thirds of global growth for the year. ^[6] Barring any further shocks, the Singapore economy is expected to strengthen in 2024, with growth becoming more broad-based. ^[7]

Bright Spots in the Alternatives Sector

Within the asset management industry, the global alternatives sector remains resilient. Despite a turbulent year for hedge funds given investor outflows, its AUM has continued to grow, reaching a record high of approximately US$4.4 trillion at the end of the third quarter of 2023, an increase of 4.6% from 2022. Asset performance and returns drove the growth of AUM and overall hedge fund performance surged through the year-end. Gains were driven by a welcome decline in inflation, positive developments in mergers and acquisitions (“M&A”) and a growing optimism in the economic outlook for 2024. ^[8]

Going into 2024, hedge fund performance is expected to improve further. Preqin estimates that the hedge fund industry will grow at an annual rate of 3.6% between the end of 2022 and 2028, to an estimated US$5.2 trillion. ^[9] We are seeing a trend towards data democratisation, which will unlock greater access to data to facilitate business and portfolio decisions. This, coupled with the evolution of generative artificial intelligence (“Gen AI”), will enable portfolio managers to enhance their research capabilities and trading strategies in order to stay competitive. I will elaborate on this later.

We have also observed strong growth in private credit. Aggregate capital raised by private credit funds globally stood at about US$151.9 billion as of the end of the third quarter of 2023. ^[10] Fundraising held up in a difficult year as investors moved into more defensive assets in the face of uncertain economic conditions. Private credit fundraising has outperformed other private capital strategies, driven by increasing investor interest in direct lending, due to its floating rate nature, a shorter term to maturity and higher seniority in the capital stack. In line with this, GPs are increasingly targeting investments into this space. The number of private credit funds in the market hit a record high last year, growing by 19% in the period from 2022 to October 2023. ^[11] Global private credit AUM is forecast to grow at a compound annual growth rate (“CAGR”) of 11.1% between 2022 and 2028 to reach an all-time high of US$2.8 trillion. This would be almost double the 2022 AUM of US$1.5 trillion. ^[12]

The figures I’ve cited are global figures, but the overall long-term outlook for Asia Pacific (“APAC”) private markets remains similarly positive, with a projected annualised growth rate of 12.7% from 2021 to 2027. Notably, APAC-focused private credit AUM is projected to reach a new all-time high of US$115.9 billion at the end of 2027, representing a CAGR of 8.0% from 2021 to 2027. ^[13]

Within APAC, Singapore continues to be an attractive centre for alternative and hedge fund managers to set up their regional investment teams. More global hedge fund managers are setting up offices here, with more than 250 of such managers as at the end of last year. We have also seen an increase in the number of private credit and other alternative managers in Singapore, including Apollo, Blackstone, HPS and Oaktree.

Mega Forces Shaping the Future of the Industry

The alternatives sector has shown good resilience in the face of headwinds. But what lies ahead? For this, we need to look at the mega forces that are shaping the future of investments. I will cover three of these forces today.

Accelerating Net Zero Transition

The first mega force – the net zero transition. While climate change is not a new topic, it is a global threat that is more urgent than ever and demands action now. Traditionally, the climate transition theme was centred around public market investments, but the focus is pivoting to private markets, creating new investment opportunities for the alternatives sector. Alternative managers can capitalise on emerging opportunities in areas such as renewable energy, green buildings, sustainable food and agriculture, electric mobility, and green infrastructure.

In addition to generating alpha for investors, the alternatives sector is uniquely positioned to address some of the most pressing challenges our world faces today. Decarbonisation is a costly affair, yet the financial support for climate action remains insufficient. By some estimates, US$9.2 trillion is needed annually to reach net zero by 2050. This is US$3.5 trillion more than what is being invested each year today. ^[14] Singapore, as an international financial hub, is well-placed to catalyse sustainable and transition financing needs for the region and globally.

To support this, MAS has launched a series of initiatives in the last few months.

First, we launched the Singapore-Asia Taxonomy for Sustainable Finance. In addition to defining green activities, the Singapore-Asia Taxonomy is the world’s first taxonomy to comprehensively define transition activities across eight key sectors. The detailed criteria for activities to qualify as “green” are aligned with a 1.5 degree Celsius net zero outcome, while “amber” activities are activities that are transitioning towards green within a certain time frame or enabling significant emissions reductions in the short term. The taxonomy will serve as a practical guide for asset managers, asset owners and other stakeholders to identify and allocate capital to green and transition activities and projects. MAS is working with industry stakeholders and government agencies to explore taxonomy use cases, including the development of taxonomy-aligned debt instruments, in both public and private markets, as well as thematic green and transition focused funds.

Another significant development is the recent establishment of the Singapore Sustainable Finance Association (“SSFA”). This is an industry-led platform that will collaborate across the financial and real economy sectors to support Singapore’s growth as a trusted, vibrant, and inclusive sustainable finance centre. The SSFA will:

• Provide clarity in standards and develop industry best practices;
• Drive innovative solutions by bringing together financial institutions and industry sectors to address the barriers that have kept us from scaling the finance needed; and
• Deepen the pool of talent to support the growth of sustainable finance.

Why is the SSFA’s work of relevance to you? Asset managers can play an active role in stewarding companies to develop decarbonisation solutions and decarbonise. There are opportunities for asset managers to work closely with their investee companies to use innovative approaches, such as blended finance and carbon credits, to drive greater impact and value. These are two priority areas for SSFA. More broadly, through SSFA, asset managers can collaborate with stakeholders in the financial and real economy sectors to scale financing in energy transition. This could be, for example, through investments in decarbonisation technologies, or in renewables and other low carbon fuels.

Growing the Digital Assets Ecosystem

The second mega force of note is digitalisation. Finance will not be spared from the digital disruption we have seen in other industries, and decentralised finance and blockchain technology have taken centre stage.

MAS is collaborating with the asset management industry through Project Guardian to pilot asset tokenisation initiatives using Singapore fund structures. Through these industry pilots, we seek to enhance operational efficiency, lower costs and expand investor bases.

• Asset managers including Schroders, Franklin Templeton and UBS Asset Management have launched pilots to explore the native issuance of tokenised investment vehicles through a Variable Capital Company (“VCC”) structure on digital asset networks.
• Alternative manager Apollo Global Management is also exploring how tokenisation and smart contracts can enable the seamless investment and ongoing management of discretionary portfolios, including those involving alternative assets. By standardising subscription and redemption processes, automating portfolio rebalancing, customising portfolios efficiently at scale and enabling cross-chain interoperability, the Apollo pilot demonstrates how portfolios can be built and connected across the fragmented landscape of funds, even when these are tokenised on multiple networks.

For this to scale, what is needed is a fundamental transformation of the financial infrastructure underpinning the asset management industry and the development of a truly interoperable digital asset network and ecosystem. To achieve this, MAS has launched the Global Layer One initiative. This seeks to establish a foundational digital infrastructure across multiple distributed ledger technology networks, to facilitate seamless cross-border transactions and enable tokenised assets to be traded across global liquidity pools, while meeting relevant regulatory requirements.

Exploring the Potential of Gen AI

Let me move on to the final mega force I will cover today. We are currently standing in the foothills of what many view as the next great digital revolution – Gen AI. With its ability to process large and diverse data sets and generate content, Gen AI has the potential to transform businesses and reshape the workforce.

In asset management, Gen AI offers the potential to improve operational efficiency – for example, in the communication of returns and performance attribution. Gen AI is also being looked at to mitigate risks, such as in the protection against cyber-attacks. Gen AI engines are also increasingly being used in fund managers’ toolkits for asset allocation and the selection of securities. We have seen financial institutions use Gen AI in ETF products – an example of this is an active ETF recently launched by Lion Global and Nomura. This ETF invests in equity securities listed on the Japanese exchanges, based primarily on recommendations from proprietary AI and machine learning models. I am sure we will see more of such use cases and products in the near future.

Given these developments in Gen AI, it is imperative that asset managers be mindful of its risks, such as when used in complex investment and compliance tasks. For example, AI hallucinations can result in inaccurate and misleading outcomes which could lead to poor investment decision-making. Another risk is data bias. If the training data used to create the Gen AI model is biased, this bias can potentially be amplified in the generated data, thereby increasing the risks of less-than-desirable compliance outcomes. MAS is working with the industry to study this further under Project MindForge ^[15] , which is developing a Gen AI risk framework for the financial sector.

As we tap on Gen AI in our work, we should also consider its consequent impact on jobs and skills in Singapore. MAS and the Institute of Banking and Finance Singapore (“IBF”) will jointly conduct a study to identify core Gen AI use cases. The study will also cover how Gen AI will be adopted and scaled in financial services, its corresponding impact on jobs and the skills required. Through this study, we will examine how we can upskill and reskill the financial sector workforce, to ensure that industry players can capitalise on the transformative potential of Gen AI, while facilitating potential job transitions and new career pathways.

AIMA – A Valued Industry Partner

The net zero transition, digitalisation and Gen AI – our collective and continued commitment to meeting these new mega forces – and the many that lie ahead – has cultivated a dynamic and vibrant asset management ecosystem. This spirit of innovation and partnership is a hallmark of Singapore’s financial centre.

AIMA plays an important role in our financial centre and is a valued industry partner. AIMA has provided helpful feedback on the development of the VCC framework and our funds tax regime. I have also appreciated AIMA’s support and contributions to promotion and engagement efforts over the years.

On this note, we hope to continue the strong partnership with AIMA as we work together to strengthen the alternatives ecosystem in Singapore. We remain committed to work closely with AIMA and its members to tap on growth opportunities, including in the key emerging areas that I have spoken about today.

I wish you a fruitful discussion ahead.

Notes

1. ^[1] MSCI AC World Index
2. ^[2] S&P Global
3. ^[3] Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla
4. ^[4] Bloomberg Global Aggregate Bond Index
5. ^[5] Preqin’s State of the Market 1H 2024
6. ^[6] International Monetary Fund – Press Briefing: Regional Economic Outlook Update for Asia and Pacific (31 January 2024)
7. ^[7] Monetary Authority of Singapore – Monetary Policy Statement (29 January 2024)
8. ^[8] Hedge Fund Research
9. ^[9] Preqin Future of Alternatives 2028
10. ^[10] Preqin Global Report Private Debt 2024
11. ^[11] Preqin Alternatives in 2024
12. ^[12] Preqin Global Report Private Debt 2024
13. ^[13] Preqin Alternatives in APAC 2023
14. ^[14] McKinsey & Company
15. ^[15] MAS Partners Industry to Develop Generative AI Risk Framework for the Financial Sector (15 Nov 2023)