Swiss Crack Down on Hedge Funds

Hordes of managers who emigrated from London now face a tough choice

European hedge funds just lost another friend, and this one was a big surprise to the industry.

In the past few years, Switzerland became the go-to place for London-based operators fleeing unfavorable tax treatment in the UK and the EU’s burdensome new Alternative Investment Fund Managers Directive (AIFMD; and see A Score to Settle with the EU).

Little noticed on this side of the Atlantic, hundreds of EU hedge funds moved their investment and trading operations from London, Frankfurt and other European capitals to Pfäffikon, a tiny village on the banks of Lake Zurich which locals now call “The Little Town of Big Money.”

In 2002, Man Group — the largest publicly-traded hedge fund in the world – pioneered the emigration from London to Pfäffikon. The attraction was a maximum 18% tax rate on personal income, no capital gains tax on individuals and “light-touch” regulation. Pfäffikon also offered proximity to the enormous capital sources available through the private banks in Geneva and Zurich. Switzerland is reportedly the second largest source of hedge fund investment in the world after the U.S.
Under the new Swiss regime, any fund accepting money from a Swiss institution will need to employ a dedicated compliance professional based in Switzerland, meet strict risk, leverage, compensation, governance and auditing standards and provide tax and asset transparency to the Swiss Financial Market Supervisory Authority (FINMA). Cooperation agreements must also be in effect between Switzerland and fund domiciles.

Until now, the only hedge fund managers regulated by FINMA were those whose funds were actually domiciled in Switzerland. The new rules will extend government oversight from 91 fund managers today to approximately 500, including such European powerhouses as Brevan Howard ($33 billion under management), BlueCrest Capital ($29 billion) and Jabre Capital ($6 billion).

That is, of course, if the hedge fund managers currently living in Switzerland actually stay there under the new regime. The fund managers now have to weigh Swiss tax benefits and capital access against the disadvantages of transparency, risk controls and compensation limits. Further to its credit, however, Switzerland does have cosmopolitan cities, beautiful countryside, skiing and close proximity to the rest of Europe. Where else are these sophisticated investment professionals going to go?