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Funds seeking lower taxation and lighter regulation - and a base far from public anger about bonuses - are fleeing to the shores of lake Zurich
Elena Moya, Tuesday 22 September 2009 18.43 BST View original article
Visitors to Pfäffikon, a small Swiss town on the shores of lake Zurich, would never suspect that they were in a hedge fund hot spot. But many have followed in the wake of London-based Man Group, the world's largest publicly traded hedge fund, which set up a base in the Swiss mountains several years ago. They are coming from the UK, seeking lower taxes, less regulation and a friendly welcome, far from public anger about bonuses.
"I moved when it became obvious that government spending was getting silly. I knew the culture would translate into higher taxes and more problems," says the boss of a fund with more than $500m under management, who recently moved from London to Pfäffikon.
Hedge funds are setting up in the mountains of Switzerland. Photograph: Getty
This mobility and freedom enjoyed by hedge funds will be scrutinised during the forthcoming G20 summit in Pittsburgh. World leaders are looking to keep them under control: US President Barack Obama publicly blamed them for blocking a restructuring deal at Chrysler, sending the auto maker into administration, while the British government was aghast to see them making millions by betting on a fall in RBS shares during the worst of the credit crunch.
But chances are that whatever politicians do, the hedgies, as they are known, are likely to be a step ahead. In Switzerland, some of them are forming small communities outside the traditional financial centres of Geneva and Zurich. "If they doubled my taxes in Switzerland I wouldn't go back to London," said the hedge fund manager who recently moved to Pfäffikon. "I don't want to spend my life commuting through the Blackwall tunnel and I don't particularly appreciate paying my tax when I get nothing back."
With a personal income tax rate of 18% and about 10,000 inhabitants, Pfäffikon is already a base for Horizon, LGT Group, RMF, Quaesta Capital, Aeris Capital and Westport Private Equity. Man Group, the largest local employer, has about 500 staff in three buildings, mostly working on marketing, asset management and regulation. It declined to comment for this story, but its well-dressed employees are hard to miss in the village, which is being transformed by a boom in construction.
"There's no recession here – there's no empty office space," said Marcel Jouault, a former hedge fund manager, who now runs local developments. Jouault's fund moved from Frankfurt to Pfäffikon four years ago, when only a few firms had followed Man Group into town. He quit the industry last year "because I could see all the trouble coming", he says, and stayed to enjoy the fresh air, personal business ventures, and to drive his Porsche – by no means the only one in town.
"The relationship with the tax person here is very personal and open," Jouault said. "If there's anything wrong, they'll rap your knuckles, but they treat you as if you're paying their salary. This tax competition [between Cantons] is beautiful because everywhere you go, you are the king."
Jouault is building a luxurious health spa, to open next year, targeting the financial industry's staff and their families. For £1,500 per year, customers will find a place to mingle. "Sometimes the partners who have moved here don't know what to do," he said.
Newcomers are bringing business with them: the local butcher at the centre of this tiny Alpine spot says sales have soared by 25%. Jda Egli, owner of the local Metzg am Dorfplatz, said her quiet life changed every lunchtime, when she and her staff rushed to serve a queue of as many as 200 English-speaking employees of financial services firms. "They're easy and fast, I get a lot of roast beef sandwich requests," she said. "I never needed to speak English here before, and I've been here for 23 years, but now I do."
Her central location and lack of competition have also given her the upper hand in other industries: knowing that a customer was trying to work in finance, she introduced him to another client at her shop, who happened to be a "big boss at one of the big firms," she said. In the end, the candidate got the job.
The clear local air, the quietness and the skiing are other things that attract hedge funds to Pfäffikon. "We came for the central location, to be near the central European market – and the mountains," said Lars Förberg, managing partner of Cevian Capital. His Swedish hedge fund opened offices in Pfäffikon two years ago, and he now employs about 10 people there – while only one person works for the firm in London.
Cevian Capital was one of about 10 hedge funds that had moved to Pfäffikon through the Business Development Centre, a venture that had facilitated the arrival of about 200 firms over the past few years, said its director Gian-Franco Cavallini. "This cluster has been built up. Before it was all grass and trees, it was very quiet," Cavallini said.
The integration has not always been smooth as hedge fund managers, in general, are not known for their openness. "They have a special opinion about themselves," Cavallini said.
Some locals also prefer grass to the glass and gloss. A centrally located carpenter is refusing to sell his wooden shop for a hefty fee, claiming that he wants to preserve the town's spirit.
Other funds have chosen a bigger town, Zug, a few miles away, to settle in. Looking at the nearby mountains, sitting on a sofa on the roof terrace of an office building that hasn't been completed yet, Karsten Schroeder said: "We wanted to get out of London – we didn't like London; personally, I strongly dislike London. It's very unattractive for me, dirty, disgusting, they have no sense of service mentality, the public transport is bad – living there is not great. Now I live by a lake and the mountains."
His $1bn futures fund moved from London to Zug at the end of last year. About eight staff moved along with him, attracted by the lower taxes and better lifestyle. "Switzerland is a great package deal, although you wouldn't go to Switzerland for the regulation, which is much better in England. But in Switzerland, taxes are just part of the equation, you also have very good recruitment opportunities."
Since April, about 15 funds have expressed an interest in relocating to Switzerland following the British government's announcement of a higher rate of tax, according to David Butler, a founding member of Kinetic Partners, a London-based consultant to hedge funds. The firm had already moved 23 funds to Switzerland in the past 18 months, Butler said.
While regulators around the world fight over how to tackle them, hedge funds are still in business. And they have a new home.