London Losing its Allure as a Trading Centre if Guggenheim Partners' Decision Making is Indicative

The politicians don't believe it when the British Bankers Association or AIMA say that tax-paying talent will leave the country, or when supply-siders say that the percentage tax take is hurting growth from entrepreneurialism. But there is evidence. UK based firms (including large cap names) have moved their tax domicile to Switzerland. Hedge fund firms founded and grown in London have opened offices elsewhere in Europe to avoid increasingly high personal tax, and to take some corporate revenue out of the UK. Several high profile leaders of hedge fund firms have left London. 

These are examples of indiginous tax paying people and entities moving outside the scope of the UK tax authorities, but there are also decisions being made not to come into the UK tax environment. London is the long-standing hub for global financial activity in the European time zone. There is no doubting London's historic position and ranking. Their is a complete range of markets in the UK's capital from capital markets to insurance and shipping to commodities and foreign exchange. So the talent pool is broad and deep, and the service support infrastructure is excellent for any sector. It is possible to find lawyers and outsourced I.T. firms and back office capability across the spectrum of tasks in London. London is expensive, particularly for real estate, and the physical infrastructure is strained, but it mostly works and everything necessary to start a business is readily available. 

The positive factors for London may not be enough any more. Guggenheim Partners LLC is a privately held global financial services firm with AUM of $85bn and offices in nine countries. It is setting up a proprietary trading platform to take advantage of the decline in bank trading with proprietary capital. Outside the United States Guggenheim Partners has offices in Dubai, Dublin, Geneva, Hong Kong, London, Mumbai and Singapore. The new venture, Guggenheim Global Trading (GGT), will have an Asian office (place to be decided), and it was a shock to read today that the European office for GGT will be in Geneva.  

These kind of decisions, to not come to London rather than actively leave the UK tax and regulatory burdens behind, are not headline grabbing and not something that can be taken as positive proof of the case. But there is collateral evidence that London is losing its allure as a trading centre.

      


Addition of 12th April 2012
It is unlikely to be related to recent tax changes in the UK Budget, but another hedge fund manager has left London for a lower tax regime. Changes on the FSA register show that the senior investment and operations staff of Tyrus Capital are no longer under the UK regulator's jurisdiction. Tyrus Capital was set up by Tony Chedraoui, the well-regarded former head of Deephaven's European investments, and is one of Europe's top 50 hedge fund firms by size.  Reports suggest that the management of the $2.7bn of assets run on an event-driven basis has moved to Monaco. 

RELATED POSTINGS: 
Hedge Fund Tax Drain (June 2010)
Mixed Messages on Health of HF Business (Nov 2010)

Mixed Messages on Health of Hedge Fund Business in Europe

Around three-quarters of the capital in the European hedge fund industry is managed out of London. So looking at the health of the British hedge fund industry effectively reflects the European industry, even taking account of leakage to Switzerland at the margin.

Corporate finance firm Imas Corporate Advisors has done some good work in tracking the investment professionals at hedge fund firms that are registered as Approved Persons with the FSA. Most senior and middle tier staff fall into that category, and it includes everyone that takes investment decisions and those with responsibilities for the direction of the individual firms.

The analysis done by Imas focused on middle-sized and large hedge fund management companies - all those with 10 or more Approved Persons on their staff, amounting to 70 firms. These top firms by size account for the majority of hedge fund assets under advisement in London, as the industry is fairly concentrated.

The result of this collation is given in graphic 1 below:

Graphic 1: Approved Person Employment Change, Q1-Q3 2010, in Larger Hedge Funds

source: IMAS Corporate Advisors/Financial Service Authority

So of the 70 largest firms, nine increased their staff during the first nine months of 2010, six held their investment staff at the same level and 55 firms reduced their staff numbers. Totting all the numbers up gives a decline in aggregate from 1288 to 989 in the year-to-date period covered - not much of surprise given the migration of staff at BlueCrest and Brevan Howard and the like to the Continent.

The second point to arise out of this part of the research carried out by Imas is that nearly half the top tier of hedge fund management companies in the UK are owned by foreign entities. Given the way that some of the very top tier of global managers downsized in 2008-9, it won't be a surprise that the firms owned by foreign entities and nationals cut investment staff numbers slightly more than their UK counterparts. 

The second area examined in the research was regulated company formations. From Graphic 2 it can be seen that the recent low point for hedge fund management company registrations with the FSA was a year ago - the hedge fund industry bottoming just before other financial sectors on this analysis of growth from the bottom up.


Graphic2: Quarterly FSA Firm Authorisations by Sector (2009-2010)

source: IMAS Corporate Advisors/Financial Service Authority

Since then there has been a run rate of around 19 new hedge fund management companies a quarter being approved for registration with the FSA, until the last quarter. The third quarter of 2010 showed a pronounced increase in the number of new hedge fund management companies being approved by the FSA. This looks to be a conseqence of the Volcker Rule, whereby banks must separate own-book risk taking from other activities, whether within the hedge fund format or proprietary capital. The second driver of hedge fund formations in London is the ongoing second-generation effect, as staff spin out of the orbit of brand name hedge fund companies to strike out on their own. Between them these two categories account for 22 of the 28 hedge fund management companies approved by the FSA in the 3Q.  

Net net hedge fund employment at the level of Approved Persons in the UK is down on the year to date, through September. Most of the hedge fund jobs lost to Continental Europe will not return to the UK in short order because the tax disincentives look like they will remain in place for some years. In addition the strategic thrust of the global hedge fund management companies is expansion into Asia ahead of a return to Europe. That written, single manager hedge fund assets across the whole of the hedge fund industry are near record levels, and more funds of funds are expected to receive net positive capital flows after the year-end re-shuffling of portfolios of hedge funds. So shortly the nadir will have been passed for most of the industry by assets, if not by number of funds, as the long tail of the industry lingers on.