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Funds to flee London as banker pressure backfires

The British capital’s status as a premier banking and financial services centre is at risk

BY EDWARD HELMORE

FIRST POSTED OCTOBER 1, 2009

The FTSE 100 is on a stimulus-funded tear, rising a record 21 per cent between July and September. Yet British business investment has plunged at its fastest rate in 44 years; the IMF is warning that a dearth of credit could derail Britain's economic recovery and that the banks, mainly in Europe, are on course to lose $1.5 trillion by the end of next year.

And Britain's banks - HSBC, Barclays, Lloyds, RBS, and Standard Chartered - have agreed to reforms governing bonus payments in the wake of the Pittsburgh meeting, their US counterparts have signalled that they intend to take a flexible approach to interpreting global guidelines.

Another story of winners and losers, one might think. But not necessarily.

The willingness of British politicians to make political hay by regulating banker bonuses could be about to backfire. The difference in approach, giving US banks the freedom to pay bonuses to employees more rapidly than their competitors outside America, may give the US-based operations a distinct competitive advantage.

And that could impact London's ability to retain its status as a premier banking and financial services centre. There are already signs of trouble ahead. According to a new report from International Financial Services London, the capital's share of the world's hedge fund assets fell two per cent last year - a loss that was almost entirely New York's gain.

Despite being the focal point of last year's financial crisis and the centre of regulatory misadventures like the Madoff scandal, the Big Apple is reasserting itself.

The figures reverse the trend of the past decade that saw London gain on New York and the ultra-wealthy suburb of Greenwich as one of the world's main centres for the hedge fund industry.

Despite being the focal point of 2008’s crisis, the Big Apple is reasserting itself

Between 2002 and 2007, London's share of hedge fund assets more than doubled to 20 per cent, with New York (which had more than half the total global business in 2001) registering most of the corresponding loss.

The hedge funders, one-time darlings of the '00s era of super-capitalism and specialists in dangerous levels of leveraged debt, have been hit hard by the crisis. Over 2,100 funds have failed, with hundreds more struggling to recoup deep losses. In the current mood, few bankers now talk so brazenly about the two per cent management fee and 20 per cent of profit pay scales that kept hedgies on both sides of the Atlantic in champagne and cocaine.

Now the pace of fund liquidations is slowing and the pace of new fund launches quickening. Moreover, research firms believe the appetite for risk is growing again. But will the new firms want to be located in London? Not necessarily.

Earlier this week Brevan Howard Asset Management LLP, Europe's largest hedge-fund manager and the darling of Mayfair, announced it will open a new office in Switzerland. The decision has prompted renewed speculation of a mass exodus from London to Geneva partly to avoid April's tax increases. Geneva is ascending fast.

But both London and Geneva could find themselves losing out to New York if Brussels' controversial new rules to regulate the alternative asset management industry are fully implemented. A recent survey by the think-tank Open Europe found that nearly half the UK’s fund managers would be "more likely than not" to move abroad if the EU directive is implemented as it stands.

"The real danger is not that new regulation kills existing funds but that it simply discourages new ones from setting up," one major London-based investor told the FT. "For an industry that is built around and driven by entrepreneurial spirit and independence, that has some big longer-term consequences for London."