May 2012

OPINION: From here to Pfäffikon

Panic on the streets of Zurich, Bern, Geneva and… Pfäffikon, to misquote the 1980s British indie band, The Smiths. Switzerland, the land of the light touch, is set to become the land of the heavy hand. And since the Swiss Federal Council proposed new hedge fund regulations last month, the hedge fund industry has been in a frightened huddle totting up the potential cost. The new regulations will come as a particularly bitter blow to those who decamped to Switzerland from London to escape the EU’s Alternative Investment Fund Managers Directive (Aifmd) and Britain’s so-called “super-tax”. This is a dangerous and outmoded mechanism whereby people who earn lots of money are asked to contribute more to the exchequer than those who do not. Many of these Wirtschaftsflüchtlinge (economic refugees), as a Swiss blogger terms them, have congregated in the amusingly monickered village of Pfäffikon. If you want to know what life in Pfäffikon is like, look no further than the Business Location Pfäffikon website. “Tax Calculator” is second on a menu entitled “Quality of Life”, ahead of such trivia as Education/Child Care, Sports and Nature and Healthcare. Doubtless Pfäffikon is a nice village. However, it is abundantly clear that as a location for hedge fund mangers it offers one thing only: proximity to Zurich but within a different canton with a lower tax rate for mail-box companies. Now the Swiss Federal Council is about to rain on Pfäffikon’s parade by implementing Aifmd – possibly with knobs on. Swiss-based hedge funds will have to disclose what they’re doing to investors and regulators, and there will be limits on staff pay and borrowing within the portfolio. Furthermore, rich folks will no longer automatically be treated as qualified investors. “Switzerland has gone from [being] one of the more reasonable jurisdictions to one of the more difficult to run hedge funds in,” Robert Mirsky, head of hedge fund advisory at KPMG, told the Financial Times. “It is a strange turnaround.” Strange indeed. And to add insult to injury, the Swiss authorities have not yet translated the proposals into English. That this is an issue demonstrates how tenuous the connection between Pfäffikon and some of its mail-box residents is. Then again, as our Swiss blogger notes, you can’t expect the sort of commitment that learning one of Switzerland’s languages would require from people who abandon their home market at the drop of a tax or regulatory change. Interestingly, the hedge fund industry seems to discern merit in the proposed changes to the Swiss investment law even if it doesn’t exactly welcome them. Marcel Jouault, chief executive of the Pfäffikon Financial Center and a former hedge fund manager, has described them as “a good thing for the investors, but a complete pain for hedge fund managers themselves”. Thus, it remains to be seen whether Pfäffikon’s economic refugees will stick it out in the self-styled “number one hedge fund location in Switzerland” when the changes come in or if they will return to London. Or perhaps consider ditching their Alpine “home” for a new location altogether. Hyenas from other domiciles are already on the prowl for Swiss scraps and there will doubtless be no shortage of principalities, financial districts and small offshore moons happy to roll over and have their tummies tickled by the hedge fund industry. Some have pushed Dubai forwards, while James Lasry, head of funds at Hassans international law firm, has been quick to fly the flag for Gibraltar, a pleasant rock close to Spain. “It is a shame to see this happening to the Swiss industry which has a time honoured tradition of investment management for wealthy clients and family offices,” says Lasry. “As a result of this move, we have seen Swiss managers actively considering other jurisdictions such as Gibraltar.” Gibraltar. Could it be the new Pfäffikon? It probably could. Alternatively, we could all base ourselves where we are actually based, pay our taxes and comply with the law. ©2012 funds europe

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