Nine years after Man Group Plc’s arrival put Pfaeffikon in the vanguard of Swiss efforts to make the Alpine nation a haven for hedge funds, the offices the town promoted for immigrating money managers are almost empty.
Pfaeffikon’s struggle to become a beneficiary of the anticipated exodus from the higher taxes and greater regulation that supposedly imperiled London as international city of choice for making money out of money is revealing, according to Joe Seet, a senior partner at Sigma Partnership, a London-based accounting and advisory firm. Traders “rely on being close to where market knowledge is, and that’s London,” he said.
That’s a notion not even London Mayor Boris Johnson dared to articulate when more than a year ago he said the U.K. government’s plan for a 50 percent income tax may prompt as many as 9,000 bankers to leave the city. The Financial Times nine months later reported that one in four employees of hedge funds was fleeing to Switzerland.
The latest figures show such predictions were about as accurate as the AAA-ratings on so many collateralized debt obligations that precipitated the collapse of credit markets and the subsequent recession in 2008. London accounted for almost 70 percent of Europe’s $423 billion of hedge fund assets at the end of 2010, compared with 5 percent for all of Switzerland -- data that hasn’t changed much the past five years -- according to EuroHedge, which has covered the industry since 1999.
Only New York ranks ahead of the British capital with about $830 billion of hedge fund assets as of Dec. 31, compared with $20 billion in Switzerland, London-based EuroHedge reported.
Brevan Howard and BlueCrest Capital Management Ltd., two of Europe’s three biggest hedge fund firms, have moved staff to Geneva in the past year, including the companies’ co-founders.
“London will always be London,” said Regina Anhorn, who helped write a report on Swiss hedge funds last September for Zurich University’s Centre for Alternative Investments and Risk Management. “Things aren’t where some people would have liked them to be in Switzerland.”
In Pfaeffikon (pronounced Feffikon), two-thirds of the lakeside village’s two-story “hedge-fund hotel” stands empty. The town’s direct investments in hedge funds also have backfired as debt markets started seizing up in 2007.
The community of 7,000 residents, 37 kilometers (23 miles) southeast of Zurich, and four neighboring villages that comprise Freienbach district in the canton of Schwyz lost about 30 percent of the 4.76 million Swiss francs ($5.4 million) that they invested three years ago in hedge funds run by Horizon21, a firm founded by Rainer-Marc Frey.
“We chose the stupidest possible point in time for the hedge-fund venture,” said Kurt Zurbuchen, the part-time mayor of the Freienbach district. “We’re trying to attract other industries to spread the risk.”
Cantons such as Schwyz and Zug have found low taxes aren’t enough to lure hedge fund managers. Swiss corporate tax rates, which include a nominal flat federal rate of 8.5 percent plus a variable component set by individual cantons and municipalities, are as high as 24.2 percent in Geneva, said Brice Thionnet, a Swiss lawyer who specializes in corporate and tax structuring at Baker & McKenzie. That compares with a rate of 26 percent in the U.K. and 35 percent in the U.S.
Schwyz is now targeting the biotechnology and medical technology industries to diversify away from financial services, said Urs Durrer, a former television executive hired in December to boost the canton’s image as a business center.
Proman AG, an oil-products company in Dusseldorf, Germany is expanding its office in Wollerau, a village next to Pfaeffikon, Durrer said. By contrast, Man Group, the world’s largest publicly traded hedge fund manager with $69 billion of assets, has reduced the number of employees it has in Pfaeffikon to 421 from a peak of about 500.
Change in Strategy
Man Group had a “big restructuring” in 2009, said Marc Duckeck, a spokesman for the London-based company. “We relocated a number of staff,” he said, without providing details.
Switzerland has been unable to cut into London’s lead because the British capital dominates trading in markets such as foreign exchange and also provides the range of back-office services that hedge fund managers depend on, said Marko Maslakovic, a senior manager in economic research at TheCityUK.
Hedge fund assets rose by about $61 billion in Britain since the end of 2006, while assets roughly doubled in Switzerland from just $9.9 billion in the same period, according to figures compiled by EuroHedge.
“London offers a lot of advantages,” Maslakovic said. “It’s the top center for cross-border financial services in the world and that’s very important to hedge funds.”
Six of the 10 wealthiest hedge-fund managers on the Sunday Times’s so-called Rich List have London as their home base, including CQS U.K. LLP’s Michael Hintze, Winton Capital Management LLC’s David Harding and Odey Asset Management LLP’s Crispin Odey, who oversee a combined $37.5 billion.
The U.K. newspaper’s list, which was published May 8, also includes Nathaniel Rothschild, who has his main residence in the Swiss ski resort of Klosters; Brevan Howard co-founder Alan Howard; and BlueCrest Capital co-founder Michael Platt. Howard, 47, and Platt, 43, both moved to Geneva last year.
“Geneva, like Greenwich in Connecticut, is very laid back, very discreet and very wealthy, and a place where a 50-year-old manager who is good at running a business ends up,” Sigma’s Seet said.
Freienbach is the home of Martin Ebner, the Swiss financier and activist shareholder. Ebner’s BZ Bank AG and Patinex AG are based in the village of Wilen.
The Freienbach district made its money-losing investment in the Horizon21 funds in April 2008, said local councilor Claudia Raeber.
“It was the first time we’d invested in a product like this and it will be the last,” she said, adding that the district withdrew from the funds in June 2009. “Taxpayers really don’t appreciate it.”
The loss gave Pfaeffikon “a black eye,” said Zurbuchen, who runs a consulting firm helping companies relocate to the village. Municipal accounts were further stretched as corporate tax revenue fell 72 percent to 5.2 million francs last year from 2007. The decline occurred as Schwyz lowered its tax rate by 5 percentage points to 11.8 percent in January 2010 to attract companies.
Horizon21 was started by Frey after he sold RMF Investment Group for $833 million to Man Group in 2002. Horizon21 closed three funds of hedge funds with combined assets of $949 million in 2009 after losses the previous year.
The firm re-branded itself 12 months ago as a private investment office in Pfaeffikon, said Adrian Janser, head of product development, who declined to comment further.
Former Horizon21 employees have started three funds that work from Pfaeffikon’s hotel, which opened in January. The offices provide software and hardware systems to help run the funds and tenants have access to a basement crèche.
For some, the lifestyle of Pfaeffikon, located about 70 miles from resorts such as Davos and Klosters, makes it appealing.
“You can go cycling over lunch and after work,” said Tilman Keese, 38, who co-founded Allmountain Capital AG after working at Horizon21. “Other fund managers are here so you can chat over coffee.”
Alegra Capital Ltd., which invests in asset-backed securities, is considering moving to Pfaeffikon from Zurich, according to Chief Executive Officer Daniel Riediker.
The “trickle” of hedge funds to Switzerland will continue, said Glen Millar of Kinetic Partners in Geneva.
“If it’s for pure tax, then they go to Zug or Pfaeffikon, and if it’s for quality of life, they will consider the Geneva-Vaud axis, or Zurich,” he said. “But London won’t be replaced.”
That’s good news for at least some Pfaeffikon residents, who are concerned about rising rents and the loss of the village’s Swiss identity.
“The hills where my kids learned to ski are all houses now,” said 65-year-old Andreas Meyer. “They both moved away because they can’t afford 12,000 francs a month for an apartment. It’s crazy.”