Start-ups advised against domiciling in Switzerland
Start-up hedge fund managers have been advised against domiciling in Switzerland amid the mounting regulatory costs in the country.
The Swiss government reformed its once unrestrictive hedge fund regulations following criticism from other national authorities that it had been lax on the issue. Furthermore, the Swiss have made it no secret they want to meet the equivalency standards outlined in the Alternative Investment Fund Managers Directive (AIFMD).
“The costs of setting up in Switzerland nowadays are going to be rather substantial, particularly for start-ups. Some experts estimate it could be in the region of Sfr 140,000 for the first movers in this space. This is because the Swiss regulator is requiring these firms be independently audited as part of the registration process. While these costs are likely to go down over time, it is going to be a challenge for sub $250 million managers,” said one consultant, on condition of anonymity.
Fund managers and distributors in Switzerland running more than Sfr 100 million are required to register with the Swiss Financial Market Supervisory Authority (FINMA). Managers distributing their product to institutional investors in the country are also required to have a representative in Switzerland.
The rules came into effect on March 1, 2013 although funds that had been distributing into the country before this date have been given a transition period until March 1, 2015. Firms intending to launch after March 1, 2013 must be fully compliant with the rules from day one.
The challenge facing Switzerland as a domicile has already been exacerbated by its diminishing investor base. The country’s funds of funds industry has seen its Assets under Management (AuM) drop from $275 billion during its pre-crisis heyday to just $175 billion today following shoddy investments, or worse exposure to Bernard Madoff.
“The Swiss investor community has receded since the financial crisis, although that is not to say people in the country will not invest. However, managers must be sure they have a readily available investor base in Switzerland before they domicile there as the costs of setting up a hedge fund are increasing,” he said.
However, Switzerland, unlike the rest of the EU through the AIFMD, has no plans yet to introduce remuneration restrictions on hedge fund managers. Furthermore, its taxation regime is highly favourable towards high earners.
Some regulators, most notably the UK’s Financial Conduct Authority (FCA) appear to be adopting a proportional approach towards remuneration although there is no guarantee the European Securities and Markets Authority (ESMA) will not overrule this and force the UK to take a tougher stance. This could give Switzerland an edge over other EU domiciles.
One consultant said he doubted Switzerland’s favourable remuneration and taxation regime would count for much. “When managers evaluate the potential savings of basing their businesses in Switzerland, they are often incremental and marginal. In addition, a lot of managers will probably not enjoy the pace of life in Switzerland,” he said.