The UK general election in May 2015 is poised to send waves through the $413bn UK hedge fund industry as the potential implications of the election are significant and polar. For instance, a successful campaign for the Conservative Party will initiate a referendum on the UK’s EU membership, a vote that could potentially spell the end of UK compliance with EU policies and begin a new era for UK hedge funds. Conversely, Labour Party policy is expected to exert pressure on the industry and could levy more taxes from hedge fund managers. Preqin’s Hedge Fund Analyst tracks 510 hedge fund managers and 1,238 hedge funds that will feel the direct effects of the upcoming election.
UK-based hedge funds have started the year strongly, generating a gain of 2.12% YTD (as of February 2015). However, this start may prove hard to maintain if Labour triumphs in May, as Shadow Chancellor Ed Balls has vowed to reintroduce the Schedule 19 Stamp Duty Reserve Tax that hedge funds are currently exempt from. Murmurings of discontent have been detected, with some fund managers expressing their disagreement with Labour’s proposal by threatening to move their businesses to offshore locations, such as Jersey. The change would certainly dampen returns later on in the year as hedge funds would have to wrestle with a heavier tax burden. The proposal was met with strong opposition from the industry, with the backlash coming at a time when AIMA, the hedge fund industry’s trade body, released a report stating that the UK hedge fund sector contributed $4bn in tax in 2014, more than twice the $1.9bn that was paid in 2009. The threat of an even greater tax burden from a post-election tax hike is therefore unlikely to encourage fence-sitting fund managers to remain in the UK.
Moves of this nature are not without precedent. Towards the end of 2013, Brevan Howard moved from London to Jersey in order to avoid complicated regulatory pressures associated with the AIFMD and in 2010, BlueCrest Capital founder Michael Platt announced that the firm was moving to Guernsey, citing the risk of greater regulation as one of the key reasons for the move. In 2009, a number of firms within the financial industry reportedly moved to Switzerland after a new top-tier tax rate of 51% on personal earnings above £150,000 was announced. Such migrations illustrate the way fund managers can, and will, uproot from the UK in search of better tax alternatives. Preqin data shows that 176 out of 510 UK fund managers have a secondary office located outside of the UK and, therefore, already have a presence elsewhere and could potentially relocate should they wish to.
There is no doubt that the general election in May will have significant implications for the UK hedge fund industry. Unhappy fund managers may decide to relocate, should the tax environment become unfavourable, a move for which there is historical precedent. Moreover, a UK referendum on EU membership could see a ‘Brexit’, or British exit, resulting in the complete reshaping of the UK hedge fund landscape.