Monday, January 18, 2010

Rush to Geneva?

more hedge fund traders join rush to Geneva:

THE UK’s third-largest hedge fund, Bluecrest, will move 50 of its highest-earning traders and fund managers to its new office in Geneva before the 50% income tax on high-earners kicks in on April 6.

The hedge fund, currently housed in an office overlooking London’s Buckingham Palace Gardens, is the first sizeable business — with $16.7 billion (£10 billion) under management — to move part of its operations to the Swiss canton.

The departure marks the beginning of an exodus of this highly mobile industry from Britain — a reaction to higher taxes and the threat of a new regulatory regime governing hedge funds from the European Union. A number of smaller hedge funds, including Amplitude Capital, have already relocated to low-tax jurisdictions. In Switzerland the income tax rate is closer to 25%.

David Butler of Kinetic, a firm that helps hedge funds to relocate, is currently working on eight mandates from British-based firms to find them office space in Switzerland. “They want to be out of the UK by April,” he said. “Geneva is the most popular choice. These people are a club: they go where the others are.” Butler predicts that up to 150 hedge funds will leave London.

Brevan Howard, the UK’s largest hedge fund, is also considering whether to open an office in Switzerland. Alan Howard, the founder, is said to be sounding out staff over whether there is sufficient demand among its 100 traders and fund managers to merit the move.

James Vernon, Brevan Howard’s chief operating officer, said that the proposed EU directive on hedge-fund regulation would make it “impossible” for it to do business in Britain.

One London-based hedge fund manager said: “They have no choice but to do this. We tried to hire a trader last week but he said he would not join unless he could be based in Geneva. People don’t want their fortunes subject to the ever-changing whim of the British government.”

Phillip Inman of the Guardian reports Johnson's warning of bankers quitting London could be a flight of fancy:

Thousands of London's bankers are poised to flee for Switzerland, the Caribbean, New York, or anywhere else that allows them to escape the capital, according to the city's mayor, Boris Johnson.

Higher taxes and an oppressive anti-City attitude from ministers, with the support of a baying public, make the capital a place where only financiers with the thickest of skins and wallets to match want to conduct business.

Johnson reckons that 9,000 bankers, hedge fund managers and private equity executives could lead the charge.

But London's major property companies disagree. Figures from upmarket estate agents Cluttons showed a renewed confidence that London would remain Europe's main financial centre, with prices of expensive homes increasing in December. Land Securities, the UK's largest property developer and owner of several prime City office blocks, says: "We have seen an upturn in City rental levels in recent months and an increase in occupier interest for new space."

Michael Strong, of CB Richard Ellis, the property consultants, says he believes any movement will be at the margins.

"At the moment there is no reason to believe there will be any material shift away from London," he says. " There isn't another centre in Europe that can compete with London, so it is still very well placed."

Johnson's policy director, Anthony Browne, is adamant that phone lines were humming before Christmas with calls from bankers upset at a 50p tax on incomes of more than £150,000, the withdrawal of tax relief on pensions for the same income group and the windfall tax on bonuses. Based on questions put to the callers about their plans, the mayor estimates the figure of 9,000 is reasonable and could cost the exchequer more than £1.2bn in lost tax and national insurance contributions.

Browne says: "Of course we don't know if they will carry out their threat, but they are very upset. As well as the level of tax, it is also the uncertainty that prevents them from planning, which is a big issue."

He warned that Switzerland was mentioned many times by callers as an alternative base for some or all of their business.

Geneva was often spoken of as a preferred location. Swiss cantons with lower tax rates and spare property are catching up. Pfaffikon is an area with around 10,000 inhabitants that enjoys an income tax rate of 18%. It has already grabbed headlines following an influx of little- known, but extremely profitable firms, including Quaesta Capital, Aeris Capital and Westport Private Equity, along with a major offshoot of FTSE 100 hedge fund Man Group, which is the area's largest employer with 500 staff.

A drift of small private equity houses and hedge funds is unlikely to worry the Treasury. But even threats from bigger players such as Goldman Sachs are unlikely to cause panic. It is understood the US investment bank is considering shifting some departments overseas.According to reports, the bank asked an internal team to examine various strategies, including whole divisions being moved abroad. While Goldman's proprietary trading arm, foreign exchange trading teams and the bank's back office operations were all mentioned as areas that could be examined, the bank's main centre will remain in London.

Finally, Patrick Jenkins of the FT reports City's role as financial centre set for new boost, says top hedge fun:

London will thrive as a financial centre over the next decade by becoming the natural western hub for emerging market growth, according to one of the City's best-known hedge funds.

In stark contrast to bankers' doom-laden predictions about the City's imminent demise, and defections of hedge funds amid relocations of some staff to Switzerland by prominent funds such as BlueCrest Capital and Brevan Howard, Tosca is convinced the growth of the Bric nations - Brazil, Russia, India and China - can only work to London's advantage.

"The idea that London is going to be full of tumbleweed in 10 years is not credible," said Savvas Savouri, chief economist at Tosca. "There are too many aspirational economies that don't have infrastructures of their own. We have an affinity with India, with the Gulf, even with China, via Hong Kong. These markets will want a western hub."

Mr Savouri predicted that London will attract at least 100,000 new financial services jobs over the next decade.

The upbeat analysis of the City's prospects comes in stark contrast to a crisis of confidence in recent months, exacerbated last month by the imposition of a 50 per cent supertax to be levied on bankers' bonus pools.

Bankers have described the supertax as confirmation of the UK's hostility to finance. It follows the introduction, from April, of a new 50 per cent top rate of income tax and moves to crack down on the taxation of so-called "non-doms" - individuals who live in the UK but are not domiciled there for tax purposes - that affect many elite foreign-born bankers.

Boris Johnson, London mayor, has warned that banks are planning to shift thousands of jobs out of the capital. JPMorgan Chase has even hinted it could abandon London as its main European base.

Tosca argues that such threats are empty. "For those concerned that tax and regulation will deflect new arrivals from London, we say this: taxes are rising and regulation is being tightened elsewhere too."

Mr Savouri's prediction is based in part on an extrapolation of the arrival of Japanese banks in the City 20 years ago.

"If the Bric economies were to match the presence in London of Japan's banks on a per capita basis, the number of incremental jobs would exceed 180,000," he wrote in a paper sent to clients last week.

So will banks leave London or even New York if higher taxes and more regulations come into effect? Not a chance. They will whine, they will threaten, but ultimately they will stay at these large financial centers. The rush to Geneva will be short-lived.

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