September 19, 2008 / 3:21 PM / 11 years ago

UK shorting ban could help rival hedge fund centres

LONDON, Sept 19 (Reuters) - Britain’s temporary ban on short-selling financial stocks is irksome for London’s hedge funds and is another factor which could help undermine the city’s pre-eminent position in Europe as a hedge fund base.

Short-selling is a key trading strategy for hedge funds as they aim to profit regardless of whether a stock is rising or falling, but London’s curbs come as rival centres seek to attract hedge funds to bolster their financial sectors.

Switzerland, France, Luxembourg and Scandinavia have all begun to emerge as alternative options for hedge funds looking for lower tax and a higher quality of life.

The European industry could follow the U.S. model and develop in a number of regional centres, although London’s upmarket St James’s and Mayfair districts are likely to remain the heart of the industry in Europe for at least the time being.

“It’s like in the U.S.,” said Thames River fund-of-hedge-funds manager Ken Kinsey-Quick. “New York dominated, then in the 90s managers started to spread to Connecticut then all over the U.S.

“London will be like New York today. I don’t think it’ll give up its pole position but it won’t get 100 percent of the business.”

Hedge funds managers in London are already facing a tax introduced earlier this year on so-called non-domiciled individuals, under which they must pay a 30,000 pounds-a-year levy after seven years of living in Britain.

Now their freedom to short-sell stocks has come into the firing line after being blamed by regulators, politicians and some market participants for accelerating the collapses in share price of banks such as Lehman Brothers and HBOS HBOS.L.

NOT POPULAR

The controls, echoed in New York, helped inspire a sharp rally of banking stocks in Europe and the United States but were not universally welcomed.

“The move may not prove popular for (hedge fund) managers in London and may also limit their ability to compete with managers based in other jurisdictions,” said Jerome de Lavenere Lussan, Managing Partner at Laven Partners.

However, he noted hedge funds would not necessarily be able to escape the regulations by moving abroad, since any rules would apply to the London-based investment banks they trade through.

It was London’s relative lack of rules, such as the Sarbanes-Oxley provisions in the United States — which imposed extra reporting requirements on companies — which made London so popular in the first place.

“One of the reasons London became so popular ... was the difficulty and expense of doing business in the U.S.”, said Odi Lahav, head of Moody’s European Alternative Investment Group.

While some other regulators followed the UK’s example, Switzerland for instance allows “covered” shorting, where a hedge fund borrows shares before selling them, as opposed to “naked” shorting, when investors sell stock without owning or borrowing it.

Switzerland has been the most prominent in marketing itself, outlining plans to simplify the tax and regulatory regime to attract hedge funds and private equity.

Some funds are already making the move — commodity hedge fund Krom River is moving to Zug in Switzerland from London to take advantage of lower tax and better lifestyle, the Financial Times has reported, although the firm declined to comment.

GREAT MANAGERS

“It (the European hedge fund industry) most certainly is expanding. There are great managers in Oslo, Stockholm, we’re seeing now some starting out in Amsterdam and Copenhagen,” said Thames River’s Kinsey-Quick.

According to news and data group HedgeFund Intelligence, the number of hedge funds based in continental Europe and the amount of money they run is showing signs of growth.

At the start of 2007, Stockholm had three with $7.1 billion and Moscow had two running $4.3 billion — numbers which had grown by the start of 2008 when Stockholm had four funds with $12.5 billion in assets and Moscow had three with $4.6 billion. London was still way ahead with 75 such funds with $348.6 billion in assets.

Cyril Julliard, co-founder of Paris-based fund-of-hedge-fund firm ERAAM, said the industry was growing in the French capital.

“I think that the AMF French market regulator has established a regime that is more or less favourable to hedge funds setting up business in Paris,” he said.

Some say the move to European locations outside London is set to accelerate as investors accept that the best fund managers do not need to be based close by — particularly in the current environment, where the average hedge fund is down 3.55 percent year-to-date, according to Credit Suisse/Tremont.

“One of the impacts of performance depression is that investors and funds of hedge funds will go further afield and look at managers they have not looked at before,” said analyst Ferenc Sanderson at Lipper, a Thomson Reuters company.

“In the old days it was expected that managers said ‘I want to be near those guys (investors)’. Now managers say ‘If I’m good enough they’ll find me’”. (Additional reporting by Sudip Kar-Gupta; Editing by David Holmes)

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