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Study highlights Zurich and its surrounding region as leading location for the international hedge fund industry
An analysis conducted by Etops AG, a provider of operational services to hedge funds and asset managers, highlights the Zurich region as the leading location in Switzerland as a base for asset managers and international hedge funds. The study shows that Zurich has a clear edge over Geneva as an appealing location.
In Pfaeffikon (Canton Schwyz) and Zug, the wider Zurich region has the most attractive locations in Switzerland from a tax standpoint, with both acting as home to significant clusters of financial companies. Zurich also has the greater potential in terms of local investor base. While around 40 percent of the relevant Swiss investors for hedge funds are based in the Zurich region, the equivalent figure in Geneva is around 30 percent.
In the study, Etops aggregated and evaluated a wide range of data – above all for the Zurich and Geneva regions – with a view to establishing the relative appeal of these locations as bases for new or existing institutional asset managers and hedge funds.
Pfaeffikon SZ, Switzerland | 1 February 2011
The study was designed to produce an objective view of the relevant facts by using official statistics, published market studies, and other assembled data. The Zurich and Geneva regions were compared on the basis of the key locational criteria for hedge funds, such as availability of qualified staff, relevant service providers, taxation, and the available investor pool. In a head-to-head comparison, the Zurich region fared significantly better than Geneva in most areas.
Michael Appenzeller, CEO of Etops, explains: «We undertook an objective comparison of the Geneva and Zurich regions. But we were ourselves rather surprised by quite how far out in front Zurich is.»
The study therefore contradicts the view often put forward elsewhere – and in Continental Europe in particular – that Geneva is and will remain the clear leading location for highly specialized financial services providers such as hedge funds.
The trend of new company start-ups in the alternative investments segment can be expected to strengthen further in the Zurich region. In the words of Marc Rudolf, head of the locational marketing organization Greater Zurich Area AG: “We are pleased by the positive resonance that the results of this study have triggered among UK hedge fund managers. Switzerland is becoming an increasing focus for the industry as the fiscal and regulatory parameters abroad start to tighten. As a result, the Greater Zurich area – including Pfaeffikon and Zug – is growing in importance.”
The study can be obtained from Etops.
About Etops AG
Based in Pfaeffikon, Canton Schwyz, Etops is the leading service provider for the establishment of and operational outsourcing for hedge funds, funds of hedge funds and institutional asset managers.
Fund managers are opposed to the European Union’s proposed short-sale disclosure requirements. They fear the rules could distort financial markets and impede their ability to manage risk.
The findings are contained in a study by the international management consulting company Oliver Wyman which was commissioned by the Alternative Investment Management Association (AIMA) and sponsored by Deutsche Bank.
The EU's proposed regulation on short-selling would require fund managers to publicly disclose net short positions above 0.5% of the share capital of companies trading on a European venue.
The European Parliament is expected to vote on possible amendments to the draft regulations on February 14.
Oliver Wyman interviewed 35 fund managers and investor groups about their views on the proposed rules. Of the fund managers surveyed, 86% said they were concerned the disclosure requirements would hamper liquidity, while 72% are worried equity bid-ask spreads will widen and 69% said they believed short squeezes would intensify.
A previous report by Oliver Wyman analysing the impact of the UK Financial Services Authority's public short-selling disclosure requirements suggests these concerns are well founded. That study found stocks subjected to the UK disclosure regime experienced a 13% drop in trading volumes while bid-ask spreads widened 45%.
One of the main concerns among fund managers is that the disclosure requirements could drive up the cost of hedging strategies or cause them to be less effective, especially if public data on short positions serves to distort or amplify price drivers in the marketplace.
Interestingly, only 9% of the fund managers surveyed by Oliver Wyman said they used single-stock equities to hedge their portfolios while over 70% said they primarily employed exchange traded funds (ETFs), futures or options for hedging purposes.
However, fund managers generally expressed opposition to public disclosure of single-stock short positions, favouring private disclosure to regulators or public disclosure of aggregated short positions.
Of the investors surveyed by Oliver Wyman, 75% said equity capital would likely be reallocated away from Europe if the short-selling disclosure guidelines were implemented, with Hong Kong emerging as the most likely destination.
"It will be increasingly hard to ignore Hong Kong as it seems to beckon alternative funds, especially with its sensitive and sensible approach to short-selling," said one person interviewed by Oliver Wyman.
Institutional investors are also likely to see a decline in revenues from stock lending programmes if the disclosure rules are introduced, accoridng to Oliver Wyman.
The study recommends European policy makers adopt a regime in line with the rules in the US and Hong Kong where private disclosures to regulators or aggregated public disclosures are the norm.
Alternatively, the negative impacts of public disclosure could be minimised if the thresholds are raised from 0.5% to 3% or higher, the report suggested.
File this one under: silver linings. Morgan Stanley Smith Barney says the financial crisis has “thinned” the number of hedge funds in the market, thus lessening competition, thus opening up opportunities for those still in the game.
In addition, says the financial services firm in its latest Global Investment Overview, other market participants (whether banks or individuals) have cut back their risk exposure, reducing competition in the sector further. Assets under management in the hedge fund space have substantially recovered, but borrowing is down dramatically. The result, according to the report, is “an attractive environment for ‘alpha’ generation.”
Other factors affecting the hedge fund space in 2011 will include the slow recovery in the credit markets; increased risk-taking by hedge fund managers; increasing dispersion of manager results; “dislocation benefits” arising from persisting macroeconomic uncertainty in some parts of the globe; and the ongoing regulation of the space (in particular, the fall-out from the current insider-trading investigation in the U.S.).
Having outlined the trends, the report goes on to consider the corresponding tactical positions within hedge fund strategies. In the equity long-short area, it says, fundamental stock pickers are likely to find “substantial” opportunities, in part because the level of interstock correlation is substantially above the long-run average. Government policies in sectors like finance and health care will also create investment opportunities. In the event-driven area, the financial services specialist expects a continued shift “from the long-credit opportunity to the alpha side.”
“During the last 18 months or so, managers have made substantial gains by following the compression in credit spreads. While average spreads are substantially off their peaks, managers have shifted to get involved in attractive risk-reward opportunities related to specific restructurings and workouts. Managers in this area will face a continuing and potentially growing supply as debt matures and deleveraging continues to work its way through the system,” says the overview.
Morgan Stanley Smith Barney says 2011 will also bring big opportunities for equity-oriented, event-driven managers. Merger activity will pick up, says the report, especially in the second half of the year, as liquidity returns to the market. “If markets and the economy continue on even a modest path to recovery, corporations will put their cash balances to work in consolidations, providing a tailwind for post-reorganization equity and merger-arbitrage strategies.”
The overview also suggests that ongoing policy action, economic stress in “core” and “peripheral” Eurozone countries, and the effects of loose monetary policy calls for the overweighting of global macro strategies next year. “More generally, volatility in aggregate markets tends to support these strategies, giving opportunities for managers to generate exceptional returns.”