By Neil Wilson
When Alan Howard, top partner at Brevan Howard Asset Management—the biggest hedge fund group in Europe, with assets of more than $31 billion—moved to Geneva, Switzerland, some viewed that step as a significant blow to the prestige of London as a financial center.
Howard's move, which was confirmed in late June, followed news earlier this year that some leading traders at BlueCrest Capital Management—with assets of more than $20 billion—had also moved from London to Geneva. BlueCrest personnel who made the switch included Mike Platt, who manages the BlueCrest Capital International fund, and Leda Braga, manager of the BlueTrend managed futures strategy.
These developments follow the move in 2007 by former GLG partner Philippe Jabre to base his new business, Jabre Capital Partners, in Geneva. With JabCap growing to assets of about $5 billion, a powerful array of talent is now trading from the Swiss financial center.
This year's moves come at a time when the role of London—for many years dominant in European hedge funds, with more than three-quarters of the assets managed in the region—is under threat. One cause of uncertainty is the European Union's Alternative Investment Fund Managers directive, which is threatening new regulatory burdens and costs for London, but not necessarily for Geneva or other Swiss centers, since Switzerland is not a member of the EU.
Another negative factor for London has been a higher marginal rate of income tax in the UK, up from 40% to 50%. Originally announced by the previous Labour government to take effect this year, it is not being immediately revoked by the new Conservative and Liberal coalition.
The rise in UK tax rates was one reason why suggestions that Howard's move had been for "lifestyle reasons" were met with skepticism in London. Against this, however, must be set the fact that although federal income tax in Switzerland is only 11.5%, the highest personal tax rate in the canton of Geneva is some 44%. Switzerland is not necessarily a low-tax jurisdiction, though unlike the UK, it has no capital gains tax on personal assets. Sources also suggest that tax incentive deals are sometimes offered by Swiss cantons to attract businesses to relocate there.
That said, there are various reasons why I do not believe the bulk of the European industry will suddenly jump ship to Geneva. For one thing, as locals in Geneva point out, it is a relatively small place, lacking infrastructure in terms of housing, schools and so on to accommodate a wholesale industry flight from London.
Geneva has also suffered serious travails of its own during the financial crisis. Traditionally, as a major private banking center, Geneva's role in the industry has largely been through funds of funds, many of which got mauled in the market meltdown and, in some high-profile cases like Union Bancaire Privée, through exposure to Bernard Madoff.
Post-crisis, some winners are emerging among the Geneva private banks that avoided exposure to Madoff, such as Banque Privée Edmond de Rothschild and Pictet & Cie. But as one Geneva-based fund of funds manager put it to me last month, "There has been an earthquake in the industry here—it's just been in a very Swiss style, in a very quiet way."
With its fund-of-funds sector diminished, Geneva needs new entrants from the single-manager side to bolster its position as a financial center. But what sort of hedge funds is it realistically going to attract?
When managers in London started muttering about moving to Geneva a year or so ago, many expected the notion to appeal mainly to new funds, for whom every dollar, pound, euro or Swiss franc matters most. It was not expected to matter so much to big established players, many of whom have already made substantial fortunes over the years. As we have seen from recent examples, however, tax savings of millions a year can be persuasive.
But most of London's leading firms—and there were some 55 London firms in the Billion Dollar Club at the start of the year—have not made the move yet.
Even the firms that have moved still have many more personnel in London, and it does not seem likely that many of the new generation will follow. Most new funds are not in a position to negotiate tax incentive deals. Geneva also lacks the huge pool of talent in the financial industry that London can offer.
London cannot afford to be complacent, because financial professionals are highly mobile. But Geneva is not a cheap and easy alternative. It may make a good home for some—as could other centers such as Zurich or Zug—but definitely not for all.