Jefferies hoping to bolster prime brokerage operations in Israel
Jefferies is attempting to fill the prime brokerage void in Israel as the country’s domestic hedge fund industry continues to show promising signs of growth.
While global bulge bracket prime brokers do service Israeli hedge funds out of New York and London, many are scaling back their operations and avoiding doing business with smaller, less profitable hedge funds as they seek to meet their balance sheet capital requirement obligations as mandated under Basel III. Furthermore, domestic banks do not offer Israeli hedge funds a pure prime brokerage service.
The Israeli hedge fund industry, while small, has been expanding over the last few years and has grown by 33% since 2012, according to Tzur Management, a Tel Aviv-based administrator. “The Israeli hedge fund industry is a growth area. It is comparable to the growth of the biopharmaceuticals or high-tech industry in the 1990s. We have heard that Jefferies is looking to fill the prime brokerage void in Israel. It is a mid-tier prime broker which has a reputation for working with managers with less than $1 billion,” said a source with knowledge of the situation.
Jefferies was a lead sponsor at the Israel Hedge Fund Association's spring conference in Tel Aviv, which had led to speculation about its intentions.
Nonetheless, Israel’s hedge fund industry is embryonic standing at just $2.66 billion, according to Tzur Management. The average hedge fund in Israel controlled approximately $30 million in Assets under Management (AuM) although the median AuM was just $10 million, which does raise questions about the commercial benefits of setting up a prime brokerage business within the country. It is believed Jefferies will seek to facilitate introductions between European and North American investors and Israeli hedge funds.
However, issues still remain, particularly around Israeli tax law. Israeli investors are subject to a capital gains tax of 30% if they allocate into hedge funds instead of the standard 25% if they invest in all other investment vehicles. This is irrespective as to whether the fund is domiciled in Israel or in an offshore jurisdiction such as the Cayman Islands or British Virgin Islands. Furthermore, investors are taxed at the end of each calendar year even if there have been no realised gains. The lack of safe-harbour rules also dis-incentivises foreign investors from putting money to work in Israeli hedge funds. This is stifling the emergence of a domestic hedge fund industry.
It is to be determined as to whether Jefferies will have a physical presence within Israel.
Jefferies refused to comment.