Zurich's tax lure for hedge funds

Date: Tuesday, April 17, 2007
Author: Ambrose Evans-Pritchard and Philip Aldrick, Telegraph

Switzerland is mulling over plans for a special 10pc tax rate for hedge fund managers in a radical move to lure the booming industry away from London.

Hans-Rudolf Merz, the finance minister, has held a series of meetings with leaders of the Swiss banking and investment world over recent weeks to thrash out fresh incentives to counter the overwhelming dominance of the City of London in finance.

The Swiss banking federation has proposed a 10pc tax on the elite managers, effectively cutting their marginal rate by 35 percentage points. Mr Merz said he was open to the scheme, saying something had to be done to stop the exodus of funds to London. "It's an idea I'm carrying around," he said. "The financial marketplace is of enormous importance to our country. I know that we have a disadvantage in taxes. We understand the problem, and we have to solve it."

The Swiss fight-back comes as fresh research shows that assets managed by hedge fund managers based in London reached $360bn (£181bn) in 2006, up 40pc on 2005, and a six-fold increase since 2002.

Although New York remains the world leader with 36pc of global assets, its share has fallen from 45pc over the past five years, according to the report by International Financial Services London.

Some 900 funds are based in London, commanding four-fifths of all hedge-fund business in Europe, or 21pc of the global total. Switzerland barely registers, a serious concern for a nation that lives off global finance. "There's no reason fund managers should be in London," Walter Kieholz, president of Credit Suisse, told the Swiss press. "It's much nicer to live here."

However, Mr Merz said London was "too strong" for a "frontal attack" by Swiss funds. "We won't be able to beat London, not even with such measures. That's not my intention either. It's absolutely vital that there's a certain competition," he told Bloomberg.

Professionals in the Swiss finance ministry are privately critical of the tax scheme, asking how it would be possible to offer a special tax rate to just one set of people - already among the world's richest.

Separately, the Bank of France, warned yesterday in a 200-page report that hedge funds posed "significant systemic risk" to the global system, noting that they now accounted for 40pc of bourse transactions, 27pc of bond deals, and 25pc of credit derivatives.

"The activities of the hedge funds is leading to lop-sided markets. Liquidity could dry up very rapidly if they decide to close their positions at the same time," it said.

While the system had weathered the collapse of Amaranth Advisers last September, this had occurred in a "very favourable" climate. "Hedge fund troubles could have different consequences for financial stability in a less friendly environment. It is not hard to imagine a crise linked to a hedge fund," it said.

The bank insisted that regulators needed access to hedge fund secrets in order to monitor the market. However, it concluded that the funds were largely beneficial.