Swiss hedge fund industry to grow as crisis bites

Date: Tuesday, October 21, 2008
Author: Reuters

GENEVA (Reuters) - Switzerland's fledgling hedge fund industry is set for growth as the credit crisis forces the industry to focus on lower-cost centers and the country aims to lure managers from London. Lower living costs, as well as better personal tax rates than London in some cantons, improving tax terms for fund firms and a high quality of life are carrots Switzerland is dangling in front of continental European managers based in London.

And as the credit crisis and huge market volatility hit returns in the hedge fund industry, Switzerland looks set to benefit even as the industry shrinks elsewhere as managers facing fee pressure and outflows look for cheaper locations.

"London is still dominant, but we're seeing some activity (new funds) in Geneva," said Mark Lewis, senior investment funds partner at Cayman Islands-based law firm Walkers Global.

"The occasional manager, start-up or transfer of business will be in Switzerland. It's a combination of Switzerland's efforts to win business and the UK government's efforts to lose it."

While about a third of global funds-of-hedge-funds assets are run out of Switzerland, single-manager funds are scarcer because tax for these structures have been less inviting.

Seventy-four firms ran just $15.2 billion in assets -- less than 1 percent of the global total -- according to a survey in June by ZHAW Center Alternative Investments & Risk Management.

However, the country is rapidly reforming to attract hedge funds and private equity.

The Federal Act on Collective Investment Schemes, which came into force last year, provides the legal and regulatory framework for setting up Swiss-domiciled funds.

And last year a group of financial industry bodies set out a master plan to increase competitiveness. Last month the Swiss Financial Center Dialogue Steering Committee approved a range of measures, including plans to simplify the taxation of performance fees and carried interest.

Switzerland's drive comes as the industry faces its biggest challenge to date. According to Hedge Fund Research, it shrank 11 percent during the third quarter as investors pulled out a record $31 billion and now runs total assets of $1.72 trillion.

As managers' assets dwindle, costs will become an increasingly important issue for managers hoping to avoid closure. Hedge funds typically have 2 percent annual and 20 percent performance fees, but there are signs these charges are finally falling.

QUALITY OF LIFE

"Hedge fund fees became 2 and 20 because London was so expensive. One percent on $100 million is $1 million, which is nothing in London with overheads," said Michel Legler, director of Swiss hedge fund firm DFL Financial Services and a member of the Swiss Futures and Options Association's executive committee.

"Quality of living and savings costs are going to be huge issues. The trend is to lower fees, because results were not what they were."

Yet in Switzerland, a country of four official languages and multiple business centers, there are obstacles to overcome.

"There are two markets," said Winfried Kilp, partner at Zurich-based consultancy FundStreet. "A business manager you bring could be a good person with a good track record, but if you want, say, one-third of your business from the French-speaking part, they may say 'I'm not in contact with anyone there'."

Nevertheless, Switzerland could be helped by the introduction earlier this year of a UK tax whereby so-called non-domiciled individuals must pay a 30,000 pounds a year levy after seven years of living in Britain.

While London, which has 80 percent of Europe's hedge funds, is likely to remain the dominant center, Italian, French and German-speaking hedge fund managers based there and keen for lower costs and a better quality of life are an obvious target for Switzerland.

Cities such as Geneva and Zurich, as well as low-tax towns such as Zug and Pfaeffikon, offer lakeside settings and easy access to mountains and ski resorts.

And on the Italian border, breathtaking lake views to the mountains beyond have helped attract a handful of firms to Lugano, such as Insch Capital and DFL.

Commodity hedge fund Krom River is moving to Zug from London for lower tax and a better lifestyle, the Financial Times has reported, although the firm declined to comment.

"It's not taking away the British (managers) ... It's for Italians sitting in London who can't stand London any more," said DFL's Legler. "For the UK it's not an issue. They don't need to be afraid that all the hedge funds will go away."

(Editing by David Holmes)