Talk of Swiss Exodus Is Exaggerated
by Bill McIntosh
Hedge funds typically are fleet of foot and ever alert to new opportunities. Hedge fund partners are always considering relative advantage in how they trade and where they invest. It is thus only natural that any firm will periodically review the relative advantage of being based in London compared with somewhere else.
In recent years, of course, there hasn’t been much competition to London. Surveys show that upwards of 90% of the European industry’s $300 billion plus in assets is managed, directly or indirectly, from the Big Smoke. But the likelihood of additional regulation courtesy of the Alternative Investment Fund Managers directive and an imminent increase in the personal tax ceiling on high earners to 50% means that more firms than ever are looking to move out. Or are they?
Recently, various Swiss cantons and consulting firms have found a receptive ear in the UK press for stories about hedge funds departing. The stories invariably focus on a couple of firms but go on to suggest that many more are looking to exit. Oddly, however, there are only a few managers that are publically known to have made the leap. One is Philippe Jabre, who set up his new shop in Geneva after being disciplined by the FSA. Another is Amplitude Capital, run by Karsten Schroeder and now in Zug, while a third is Altis Partners, the Jersey-based managed futures firm. There may be other firms that have gone but they don’t appear to be among the industry’s key players.
Some managers consulted prime brokerage advisors at Morgan Stanley and Goldman Sachs, among others, but say they were told that the relocation phenomenon is being blown out of proportion. “There is a lot of talk, not too much action,” says one equity long/short manager who made inquiries. But this doesn’t mean that nothing is changing. Just as most of the industry’s marquee names have long operated from multiple jurisdictions, anecdotal evidence suggests that many small-to-medium sized firms are also looking to enhance their operational flexibility.
One thing that is occurring, according to a leading prime broker, is that firms are exploring setting up a management company in a more tax efficient locale. This is seeing some funds set up a second leg in Switzerland but still keep London as the main operating centre. Though London is expected to be the top European financial services hub for the foreseeable future, hedge fund principals can decamp to build a second leg but still visit the UK weekly or fortnightly, thus escaping the clutches of the Inland Revenue.
Another spur for setting up a Swiss office is to take advantage of the light regulatory structure. At a time when regulatory upheaval is a certainty in both Europe and the US, the Swiss system’s use of referenda means that change, if it comes, will be slow. But it could be tricky to decamp completely from the UK in case the AIM directive puts heavy restrictions on non-EU funds. So it seems likely that firms will want to guard their EU regulatory optionality by keeping a London presence. Having dual offices thus gives a fund a regulatory toe-hold in each system.
Consultants and managers note that life style, too, is a key consideration. Firms that canvas their partners about moving abroad often find it difficult to convince wives and family to rip up their lifestyles and relationships. The Swiss Alps may be beautiful and have their fans, especially among partners with young families, but the cantons around Zurich can be tough socially for non-German speakers. And Zurich, whatever its charms, pales beside London as a cultural and entertainment centre.
Nor should it be forgotten that Switzerland is itself badly bruised from the credit crunch. Private bank customers in Geneva lost an estimated $7 billion in Madoff and many funds of funds in the city are still bleeding. The woes that have afflicted UBS have ensured that Zurich, too, has felt the pain. Moreover, capital is flowing out as tax amnesties in Italy and Germany encourage investors to bring money home.
A couple of conclusions seem clear. One is that London will continue to be the centre for the European hedge fund sector for well into the future. The slide of sterling against the euro and the Swiss franc now gives the city a competitive cost advantage. At the same time, however, some overseas competitors, including Switzerland, may gain business. The upshot is that the UK will lose some tax revenue until a new government shows that taxation ceilings have peaked and can point to time when they can begin to come down. Talk of a significant shift to Switzerland thus seems exaggerated.
In recent years, of course, there hasn’t been much competition to London. Surveys show that upwards of 90% of the European industry’s $300 billion plus in assets is managed, directly or indirectly, from the Big Smoke. But the likelihood of additional regulation courtesy of the Alternative Investment Fund Managers directive and an imminent increase in the personal tax ceiling on high earners to 50% means that more firms than ever are looking to move out. Or are they?
Recently, various Swiss cantons and consulting firms have found a receptive ear in the UK press for stories about hedge funds departing. The stories invariably focus on a couple of firms but go on to suggest that many more are looking to exit. Oddly, however, there are only a few managers that are publically known to have made the leap. One is Philippe Jabre, who set up his new shop in Geneva after being disciplined by the FSA. Another is Amplitude Capital, run by Karsten Schroeder and now in Zug, while a third is Altis Partners, the Jersey-based managed futures firm. There may be other firms that have gone but they don’t appear to be among the industry’s key players.
Some managers consulted prime brokerage advisors at Morgan Stanley and Goldman Sachs, among others, but say they were told that the relocation phenomenon is being blown out of proportion. “There is a lot of talk, not too much action,” says one equity long/short manager who made inquiries. But this doesn’t mean that nothing is changing. Just as most of the industry’s marquee names have long operated from multiple jurisdictions, anecdotal evidence suggests that many small-to-medium sized firms are also looking to enhance their operational flexibility.
One thing that is occurring, according to a leading prime broker, is that firms are exploring setting up a management company in a more tax efficient locale. This is seeing some funds set up a second leg in Switzerland but still keep London as the main operating centre. Though London is expected to be the top European financial services hub for the foreseeable future, hedge fund principals can decamp to build a second leg but still visit the UK weekly or fortnightly, thus escaping the clutches of the Inland Revenue.
Another spur for setting up a Swiss office is to take advantage of the light regulatory structure. At a time when regulatory upheaval is a certainty in both Europe and the US, the Swiss system’s use of referenda means that change, if it comes, will be slow. But it could be tricky to decamp completely from the UK in case the AIM directive puts heavy restrictions on non-EU funds. So it seems likely that firms will want to guard their EU regulatory optionality by keeping a London presence. Having dual offices thus gives a fund a regulatory toe-hold in each system.
Consultants and managers note that life style, too, is a key consideration. Firms that canvas their partners about moving abroad often find it difficult to convince wives and family to rip up their lifestyles and relationships. The Swiss Alps may be beautiful and have their fans, especially among partners with young families, but the cantons around Zurich can be tough socially for non-German speakers. And Zurich, whatever its charms, pales beside London as a cultural and entertainment centre.
Nor should it be forgotten that Switzerland is itself badly bruised from the credit crunch. Private bank customers in Geneva lost an estimated $7 billion in Madoff and many funds of funds in the city are still bleeding. The woes that have afflicted UBS have ensured that Zurich, too, has felt the pain. Moreover, capital is flowing out as tax amnesties in Italy and Germany encourage investors to bring money home.
A couple of conclusions seem clear. One is that London will continue to be the centre for the European hedge fund sector for well into the future. The slide of sterling against the euro and the Swiss franc now gives the city a competitive cost advantage. At the same time, however, some overseas competitors, including Switzerland, may gain business. The upshot is that the UK will lose some tax revenue until a new government shows that taxation ceilings have peaked and can point to time when they can begin to come down. Talk of a significant shift to Switzerland thus seems exaggerated.
