Today's Wall Street Journal reports on recent estimates of the proportion of UK hedge fund employees who have - or likely may - move to Geneva and other locations in Switzerland. One UK consultancy firm was quoted giving an estimate that up to 25% of UK hedge fund professionals could emigrate; the WSJ, however, reports on various other estimates closer to the 10% range.
Irrespective of how many people leave the UK, there remain some interesting issues which can impact operational and business risks.
The first is the obvious point that Switzerland, while offering a wonderful quality of life, is an extremely expensive place to live. It is also resource constrained, especially in key infrastructure areas such as available school places for children. For the top echelons of hedge fund managers who are not financially constrained, these issues are irrelevant: for many employees who are not as well compensated - and that would especially include many in the back office - cost and infrastructure issues can be punitive.
What could emerge, therefore, is a situation where key front office professionals choose to move, but many in the back office are left behind to continue working from London. Equally, firms that do relocate their entire operation will find that a sizeable proportion of their teams either do not want to move due to family and personal ties or, equally, just simply can't afford it and hence leave.
Turnover in back office operations clearly increases operational risk. Separately, a situation where front office risk takers operate from a location separate from the back office changes the culture of an organization, reduces cohesion between the teams, and increases the risk of miscommunication, inefficiency and error in trade processing. All material issues for investors.
Secondly, the near term reason for moving to Switzerland is tax avoidance, given the growing disparity between UK and Swiss tax rates at high income levels. However, a medium term motivation is the issue that Switzerland is not in the EU and is therefore outside the scope of the proposed EU Alternative Investment Fund Managers ("AIFM") Directive. While the final form of the AIFM may well have negative features (just as mandatory SEC registration is not unambiguously positive, either), net net, the privilege of managing someone else's money is a fundamental, fiduciary responsibility which should be subject to regulatory oversight. Investors, therefore, may well question why firms elect to leave the well regulated UK jurisdiction and, in due course, the AIFM framework.
Perhaps the most interesting question is what investors think about moves to Switzerland, Bermuda, Singapore or other offshore locales. Consultants eager to earn fees assisting with the redomiciliation process have been very vocal as to the benefits of leaving the UK. What we have not seen, however, is a survey which asks institutional investors whether they would prefer to see their managers stay in the UK or leave. We can guess as to the answer, but it would be very interesting to see that data point.
UPDATE: A few days after the above post, we were interested to see an article in the Swiss press commenting on the pressures faced by Geneva as it welcomes new workers. According to the article, "Geneva struggles to attract foreign business":
"Geneva may be an international player in the big city stakes, but its economic chief has admitted that it does not have any room for any more large companies.
The city has been at a housing and transport standstill for years, and without the necessary infrastructure, Geneva could not cope with a large influx of people should a major firm want to relocate there."
Hedge Fund Operational Due Diligence
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