Expected hedge fund stampede turns to trickle

Private bankers head Pierre Darier opened the annual conference Keystone

Switzerland is badly placed to take advantage of British tax changes by luring hedge fund managers over from London, the Swiss Private Bankers Association says.

Many wealthy investors are seeking new bases for their operations, but most are giving Switzerland a wide berth. This is because tax conditions here are, unusually, less advantageous than in other European countries.

One financial newspaper predicted last year that “dozens and dozens” of hedge fund managers would move from London to Switzerland following changes to British tax regulations that would hit their personal profits.

But Jacques Rossier of the private banking umbrella organisation said that while managers are taxed just ten to 15 per cent in France and Germany, Switzerland imposes a 50 per cent levy on their personal wealth.

“They are looking around and Switzerland is an attractive place in terms of living conditions and quality of life. But today, unfortunately the tax environment in Switzerland is not particularly favourable for a hedge fund manager,” he told swissinfo.

“Some might take the risk to negotiate with some of our cantonal tax authorities to find a favourable solution – apparently there are a few negotiating with Geneva, Zug and Zurich. But the risk they are taking is that at the federal level they might later have a problem and be forced to move to another place.”

Hedge funds – investment groups usually made up of wealthy people – are one of the most dynamic and successful innovations in the financial sector. But only four out of 9,500 managers who run the funds are currently set up in Switzerland.

A report last year predicted an influx of managers would increase Switzerland’s share of managed assets from SFr130 billion to SFr320 billion. This would add SFr7.6 billion to the nation’s economy, generate 2,000 new jobs and collect SFr450 million in new taxes.

Positive outlook

Politicians, the tax authorities and the financial sector are working to achieve a new tax solution, but Rossier warned that this is unlikely to be before the end of the year.

Rossier, speaking at the Swiss Private Bankers Association annual conference, reiterated calls to restore the country’s financial institutions to one of the top three markets in the world. Switzerland has dropped from second place to sixth in the past 20 years.

The private banking scene enjoyed a prosperous year in 2007, attracting more assets, taking on more employees and recording healthy profits.

The outlook for the sector remains good, according to banker Nicolas Pictet, but he warned of a possible negative effect from the collapsed United States subprime mortgage sector driving markets down further.

“Last year was a good year and we are starting this year with a positive outlook, but it remains to be seen if the negative performance of the stock markets is long lasting. In this case, indeed, we may have a more difficult year in 2008,” he told swissinfo.

swissinfo, Matthew Allen

Key facts

The Swiss Private Bankers Association was founded in 1934 and now represents 14 members.
These include famous names such as Pictet, Rahn & Bodmer, Wegelin and Lombard Odier Darier Hentsch.
Managed assets increased by SFr94 billion to SFr510 billion in 2007 while profits of its members increased on average by 25%.
The number of employees rose by 561 to 5,426.

Hedge funds

Hedge funds first sprang up on Wall Street in the 1940s primarily to invest money for the wealthy. There are an estimated 9,500 funds globally with assets of around $1,400 billion.

The financial term “hedging” is making an investment specifically to cancel out or reduce the risk of another investment.

Hedge funds devise complicated strategies to make money by gambling on the direction of markets, currencies and commodities. They also buy shares in companies rumoured to be merging with others.

Two thirds of this wealth is located in the US, mainly New York, with around 20% in London – that has cornered around 90% of the European wealth.

Switzerland does well from investment vehicles known as funds of funds, which repackage and resell hedge funds, handling about a third ($200 billion or SFr237 billion) of the global business. But it enjoys less than one per cent of the $1,400 billion (SFr1,661 billion) of wealth generated by individual funds.