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ANALYSIS-London hedge funds talk the walk over Swiss move

Published 10/01/2009, 09:50 AM
Updated 10/01/2009, 09:54 AM

* Firms eyeing UK general election, tax plans

* Also watching developments in EU draft directive

* Swiss take to the road, showcase move benefits

By Laurence Fletcher

LONDON, Oct 1 (Reuters) - A hedge fund exodus from London to Switzerland in the face of higher taxes and tougher EU rules is unlikely to occur this side of a British general election, although the industry pretender remains ready to pounce. Eyeing a new lakeside life of lower taxes and softer rules, many fund managers have said they would leave London's glitzy lights for good if the Labour Party's plan for a new 50 percent top tax rate becomes reality.

"I and a lot of friends are hanging in there to see what happens to the tax rate when (opposition leader David) Cameron gets in," said one fund manager in London, speaking on the condition of anonymity.

Pedro de Noronha, fund manager at Noster Capital, was equally focused on the tax issue when he spoke to Reuters last month, saying he would quit the UK for Switzerland, Monaco or Miami if the higher rate comes in. (http://blogs.reuters.com/hedgehub/2009/09/08/miami-nice/)

The wait-and-see approach means few have cut ties with Europe's throbbing hedge fund heart in favour of industry dwarf Switzerland and followed commodity hedge fund Krom River, which last year became one of the first funds to move, setting up shop near Geneva.

Brevan Howard, Europe's biggest hedge fund firm, said it plans to open a Swiss office, Reuters reported last week, but said the move was for staff who "for personal reasons" want to move and had nothing to do with tax rates.

ON HOLD

The UK is home to 80 percent of Europe's roughly $400 billion hedge fund industry, while Switzerland, although a major centre for funds of hedge funds, housed just 3 percent of hedge funds, according to 2007 data from the Zurich School of Management and Law.

A record UK budget deficit leaves little room for manoeuvre to any new government, however, and while many managers hope the Conservatives will scrap the top rate plans for those earning more than 150,000 pounds ($238,200) a year, the party has so far refused to commit to it.

For a multimillionaire hedgie, the savings could be huge.

A manager moving to Zug, a small town in central Switzerland close to Zurich, would see personal tax fall to around 15 percent from 50 percent if they pay themselves in dividends, said Jonathan Ivinson at law firm Hogan and Hartson.

Tax could be lowered even further if a firm can argue that part of its profits are generated by its offshore activities or if salaries are capped and compensation is paid via a share plan, he added.

In addition to the tax issue, many fund mangers are keen to see how a controversial draft European Union directive on hedge funds pans out, with an answer due, probably, next year. Costs from the plan might amount up to 100,000 pounds for a small firm.

"I have several (relocation) projects that are on hold. As soon as it (the directive) is resolved it will be a very different story," said Jonathan Ivinson, partner at law firm Hogan and Hartson.

Whilst moving to Switzerland could bar managers from selling into the EU, it would free them from restrictions such as controls on leverage, which service providers they must use and even, potentially, where their funds are domiciled.

TRICKLE

While the threatened flood of hedge funds from the UK to Switzerland remains just a trickle, the latter is upping its share of the pie and remains eager for more.

Switzerland has steadily been gaining hedge fund managers even as the wider industry shrinks, attracting between 12 and 24 funds a year from other locations, according to Peter Meier of Zurich's ZHAW School of Management and Law.

The country's single manager hedge fund community, at around 125 funds, is dwarfed in size by London but has grown around two-thirds from 74 funds just over a year ago, and the country is actively luring others.

Up to 50 hedge fund executives this month turned up at a "Moving to Switzerland" briefing in London's Mayfair, the affluent heart of the City's hedge fund industry, at which Zug's Economic Promotion Office spoke on the benefits of moving.

Most at the meeting, which was backed by top-end property firm Aylesford International, ABN Amro private banking and Hogan & Hartson, were simply curious about moving to one of Switzerland's tax-friendly cantons.

But the lakeside lifestyle is not to everyone's liking. One manager at the briefing said he had looked closely at a move -- but had been put off by the lack of nightlife in Zug.

While an absence of nightlife would not be a deal breaker for all fund managers, the one thing Zug may struggle to usurp is London's place at the heart of global trade. "People want to live in London, it's a major financial centre," said Lachlan Roos, UK tax hedge fund specialist at PricewaterhouseCoopers. ($1=.6298 Pound) (Additional reporting by Martin de Sa'Pinto in Zurich, Editing by Douwe Miedema and Simon Jessop) (To read the Reuters Hedge Fund Blog click on http://blogs.reuters.com/hedgehub; for the Global Investing Blog click on http://blogs.reuters.com/globalinvesting/)

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