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London’s ‘Twin Pillars of Doom’ May Spark Hedge Fund Exodus


Date: Thursday, April 30, 2009
Author: Tom Cahill and John Rega, Bloomberg

After helping to move 23 hedge funds to Switzerland from London in the past two years, David Butler describes the flow as a “steady trickle.” Now he’s bracing for a flood.

“Call it the twin pillars of doom,” said Butler, a founding partner at hedge fund consultancy Kinetic Partners LLP in London. “Put together the U.K. tax changes and what the ogres in France and Germany have created and you will see a mass migration.”

Butler said inquiries about relocations have gone up “by a factor of 10” since Britain pledged a new 50 percent rate for top earners on April 22. Many came from fund managers already mulling a move after the U.K. tinkered with tax rules for non- domiciled workers last year. They’re calling again after the European Union, backed by France and Germany, proposed yesterday to regulate buyout firms and hedge funds managing more than 100 million euros ($134 million.)

The EU is pushing for tighter regulation with an “all encompassing” approach after markets fell in 2008. The hedge fund regulatory threshold was lowered “at the last minute” at the urging of Socialists in the European Parliament.

“The directive has been allowed to become a politically motivated attack on the U.K.’s successful investment management industry,” said Richard Perry, a partner in the financial services practice at Simmons & Simmons, a law firm in London. The measure may drive many fund management businesses outside Europe, he said. “This could inhibit the growth of London’s hedge fund industry significantly.”

Leaving London

London, home to at least 80 percent of Europe’s estimated $400 billion in hedge fund assets and about 60 percent of Europe’s private equity firms, may suffer as funds decide leaving is easier than complying with new regulations.

“There is a profound disincentive to base businesses in Britain that could as easily be run from Zurich, Dubai or for that matter New York,” Simon Walker, chief executive officer of the BVCA, the U.K. buyout industry’s lobby group, told reporters in London on April 29. “This is one of the biggest problems: it’s a disincentive to run businesses out of London.”

Geneva is the likeliest next port of call for managers who’ve had enough, said Butler. Switzerland encourages hedge fund managers to join a Swiss asset management trade group, said Joe Seet, founder of Sigma Partnership, a financial service consultancy in London and former hedge fund manager.

“It’s like joining a country club and you’ve got to follow the rules,” he said.

Tax Negotiation

Personal taxes for wealthy foreigners can frequently be negotiated with the local authorities in Switzerland, depending on the canton where the manager lives, and may be based on projected expenditures, not income, said Seet. “If you are a down-to-earth billionaire you can negotiate a rate based on what you spend,” said Seet.

Hedge fund managers in Britain are already regulated by the Financial Services Authority, which may prevent some from going because investors appreciate protection from that regime, said Antonio Borges, chairman of the Hedge Fund Standards Board, which has crafted a voluntary code of conduct for hedge fund managers.

“The U.K. regulatory system is still the best in the world and will survive despite this onslaught,” said Borges. “I suspect most hedge fund managers will stay in London because I don’t think long-term these rules will have much success. They have to be significantly modified because it creates too many issues about the industry in Europe.”

EU ‘Too Late’

Managers who meet the EU requirements, including minimum capital, would be eligible to offer their funds to professional investors anywhere in the region.

The EU’s plans “lacked ambition” and came too late, the European Parliament’s Socialist group said on its Web site. “The final proposal does not come close to meeting our expectations,” said Martin Schultz, head of the Socialists in the Parliament.

Poul Nyrup Rasmussen, a Danish Socialist in the Parliament who led the push for EU rules, has said managers threatening to leave Europe were bluffing and wouldn’t want to lose access to Europe’s nearly half a billion investors.

Seet, at Sigma, said many managers inquire about moves to Switzerland, then balk over cultural issues.

‘Bursting the Gate’

“The primary language in Geneva is French, and you really have to speak French; it’s not like the Cote D’Azur where you can get away with English,” said Seet. “Moving is not such an easy thing to do.”

Butler at Kinetics said hedge fund managers who previously balked at moving because of concerns like pulling children out of school, and moving house will look past those now.

“These two barriers change the whole ball game,” said Butler, who declined to name firms considering a move. “Now there’s nothing to stop them bursting through the gate.”

To contact the reporters on this story: Tom Cahill in London at tcahill@bloomberg.net; Edward Evans John Rega in Brussels at jrega@@bloomberg.net