Wednesday, September 26, 2007

Switzerland - The Financial Pied Piper?

With over 9,500 hedge fund throughout the world creating over $1,400bn of wealth world wide, the race is on to draw the hedge fund managers from their traditional hide outs such as London and New York. Like the Pied Piper of Hamlin, the Swiss are starting their hypnotic tax tunes to tempt the hedge fund managers to within their borders.

The Swiss Federal Banking Commission issued a report earlier this week calling for more to be done to attract hedge funds into the country and they are, again, seeing tax as the key to this. We wrote an article here disputing this as the current regulatory structure is pretty much stacked against starting a hedge fund in Switzerland because of rules on diversity and equivalent regulation etc.

It is an interesting topic, however, as the nature of most funds is that they are run by few people and are boundaryless (most are set up in the BVI and the Caymans and run from London or New York for example). This makes the hedge fund management industry highly portable.

The portable nature of hedge fund management companies makes the job of the regulators and politicians a little more difficult than, perhaps, they think it is. We have seen much sabre rattling by governments and regulators looking to 'curb the excesses' of hedge funds via regulatory changes and, especially tax changes. In an excellent article from 'Greentrader' they discuss the consequences of the potential change of capital gains becoming income and being taxed accordingly. The 'Start Making Sense' blog has some interesting points too.

What is interesting for me, however, is the fact that hedge funds are so portable that any punitive tax regulations for hedge funds or for private equity funds, for that matter, could be quickly cancelled out by other jurisdictions, such as Switzerland, welcoming the managers with open arms while the traditional jurisdictions ponder the own goals they just scored.

Imagine a scenario where the big earners in the fund industry descended on Geneva and Zurich instead of London or New York. What economic effect would this have on London, as an example? I would imagine, for a start off, that estate agents wouldn't be too happy (every cloud has a silver lining). In reality the hedge fund managers are not going to move to the Bahamas, Caymans or the BVI, but centers such as Geneva and Zurich, with the right regulatory framework and attractive taxation could suck the life out of the industry in both London and New York.

It may be fanciful to say that fund managers would up and leave these countries for Switzerland (especially the US funds) but Switzerland is not a way out country on some chain of island somewhere, it is in the middle of Europe (without the inconvenience of many EU rules), it is business friendly like no other country I have ever been and the Swiss know how to make the rich feel welcome, after all, they have been doing it for centuries.

I used to think that I would get a nose bleed if I was too far away from London, such was the vibrancy of the financial district there, however, recent trips have shown the place to be over priced for office space with no discerning benefits except perhaps for Corney and Barrows on a Thursday night.

With technology almost at the point that you could trade on a deserted island in the middle of the Pacific Ocean, the argument for 'having' to be in one of the big financial centers is waning and more and more people are realising it. In an article we talked about 'The Monaco Boys' working in London and living in Monaco. This should serve as a reminder to politicians and regulators that, these days, business is fluid and when you have an industry that generates so much money, is run by so few people over a few computers and telephones, to move and set up in business in a more friendly jurisdiction would take days not years.

I hope the Swiss do follow through with amendments to the regulations and tax rules to make it more conducive to fund managers making a home here. What would I say to anyone contemplating it?

I have a postcard on my office wall that says '¥€$' - 'Swiss Philosophy' - need I say more?

If you would like to get a taste of the community in Switzerland, there are tons of expat site...I like the look of a new one that has started...check it out here.....

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