Hedge fund managers might want to begin to learn some Czech as the Eastern European nation becomes one of the latest countries attempting to kickstart a domestic financial industry. The opportunity to establish Prague as a financial center comes as a change in European Union regulation, coming into effect in July, gives preferential treatment to funds located within the borders of the Eurozone. While many of the thousands of hedge funds that will be seeking a local presence will look at the traditional hedge fund hubs such as Luxembourg, many other cities and countries are seeking the opportunity to host firms and the high paying jobs that they bring.
Perhaps surprisingly, the Czech Republic is well positioned as an attractive option for hedge funds, with relatively low local costs of office space and labor, close connections via air to major European centers and a relatively strong financial system. The country’s credit ratings are sound and, in fact, Czech government bonds are trading at a premium to higher rated French securities. That said, political risk remains elevated compared to other European nations, with one of the leading Socialist parties outwardly expressing a less than enthusiastic attitude towards business.
Capacity Issues Leave Luxembourg Stretched
The flood of hedge funds seeking European offices is beginning to have an impact on traditional centers such as Luxembourg. As prime office space and staff become scarcer, firms are finding it more difficult to establish a presence at an affordable price. This is where countries such as the Czech Republic come into play, offering firms the ability to establish a presence within the boundaries of the European Union, but at a very affordable price.
“There may be an issue of capacity backlog in Luxembourg and Ireland if tens of thousands of funds want to domicile,” Czech Deputy Finance Minister Radek Urban told Bloomberg, indicating his plans to draft legislation favorable to firms that wish to locate within his country.
This capacity issue has only been increased by financial turmoil in Cyprus, which has effectively eliminated one potential financial center from the list of hedge funds seeking European offices. While this reduced supply works in favor of countries such as the Czech Republic, it may also increase the important of financial and political stability in the finds of prospective companies.
The Czech Republic Not Only European Country Vying for Hedge Fund Offices
The Czechs are not alone in seeking out the tax revenues and highly skilled jobs that hedge fund offices bring to their economies. More traditional financial hubs such as Frankfurt and London are also expressing interest in making themselves more attractive to potential re-locators. While these jurisdictions certainly carry higher costs than Eastern European locales, they do offer more perceived stability politically and closer physical connections with important markets. While this additional stability will likely drive most of the hedge funds seeking European offices to setup in Western Europe, certainly many will be tempted by lower costs and consider the Czech option.