Singapore’s central bank proposed tighter rules for hedge funds managing assets below $250 million, requiring them to have a minimum capital and two representatives residing in the city state.

Regulators around the world are tightening rules that will increase scrutiny of hedge funds and heighten oversight of derivatives in the wake of the global financial crisis.

Singapore’s proposed rules, outlined in a consultation paper on Tuesday, said fund managers who serve 30 sophisticated investors would be encouraged to buy insurance cover against legal risk though it would not be mandatory for firms managing assets below $250 million.

The Monetary Authority of Singapore also for the first time categorised fund managers into three groups — notified fund management companies such as hedge funds, licensed fund firms and asset managers that serve retail clients.

The smaller fund managers have to demonstrate a commitment to their business such as the chief executive or executive directors having a majority stake in the firm, or fund managers providing seed money.

In the past fund managers in Singapore with fewer than 30 “accredited” investors were exempted from holding a capital markets services license, freeing top managers from requirements such as filing certain reports to regulators and passing examinations set here.

There are some 140 hedge fund managers in Singapore and they manage at least US$35 billion ($48 billion) in assets, according to the Alternative Management Industry Association of Singapore.

The industry, which suffered record losses in 2008 as markets tumbled during the global financial crisis, has seen a strong rebound last year.

Singapore has attracted asset managers, private banks and hedge funds in recent years with tax incentives and strict secrecy rules. It also provides investors the opportunity to manage part of the more than US$300 billion in assets held by its sovereign wealth funds GIC and Temasek.