Throughout much of the Western world, the hedge fund industry has been targeted by governments that have been active in imposing additional regulations across the financial industry. After gaining a reputation as a source of some of the biggest bets and most reckless risk taking in the lead up to the financial crisis, hedge funds have borne some of the worst of these new regulatory measures. Fund managers are adapting by shifting operations offshore or to locations with a more friendly regulatory regime. Unfortunately for governments, this is actually leading to less real oversight of the types of activity they sought to control.
Swiss Hedge Fund Industry Seeks Out Friendlier Jurisdictions
After being well regarded amongst the hedge fund industry for its lenient investment regulation systems, Swiss regulators are now moving to increase oversight of hedge funds along with other alternative investment classes. In order to continue to market to EU investors, Switzerland has been forced to amend regulations to mirror the EU’s “Alternative Investment Fund Manager’s Directive,” which involves substantially increased compliance and reporting obligations. According to Bloomberg, many Switzerland-based funds are looking at moving their operations to Liechtenstein in order to gain this EU investor access earlier, without the additional oversight from the Swiss Financial Market Supervisory Authority, which is perceived to be stricter than in the neighbouring principality. Swiss funds will not be permitted to obtain a “passport” to market to EU investors until 2015 under the existing European Union rules, while relocation to Liechtenstein will provide immediate access. The regulatory changes also apply to private equity and real estate funds that are currently based in Switzerland.
New Zealand Positioning Itself to Take Advantage of New Regulation
Certain countries have welcomed the benefits of having a strong financial sector and are seizing upon the opportunity to implement regulatory regimes friendly to the hedge fund industry. New Zealand is one country that may not have come to mind in the past when thinking of financial hubs, but it is actively reforming legislation to attract hedge funds and other alternative investment managers. The island nation will be adopting oversight rules that bring it into compliance with the EU guidelines while attempting to also make important concessions to attract funds, allowing Asia-Pacific hedge funds to access European capital through a reliable and advantageous regulatory regime. One critical proposal is elimination of all taxation of fund returns from investments not based in New Zealand. This will allow funds to flow returns back to Europe and other locations from investments across the region without incremental tax being imposed. This sort of friendly approach to the hedge fund industry could result in New Zealand becoming a bigger player in financial activity in the Asia-Pacific region and is further evidence that a collaborative, open-minded approach can yield positive impacts for both countries and funds.
Additional Regulation may actually Result in Less Oversight
In many countries, we’ve seen additional regulation and compliance requirements force firms offshore or to countries with softer rules or less enforcement. As a result, in some cases there has been a weakening of the actual oversight of the risk-taking activity that countries are trying to reduce or at least monitor. While many countries have pushed funds out through this kind of heavy-handed approach, others such as New Zealand are actively attempting to attract the hedge fund industry through a collaborative approach to regulation. Going forward, expect to see more countries take advantage of the burdensome rules being imposed in traditional jurisdictions by opening up their own financial markets to alternative investment fund managers.