Swiss Plan EU-Style Hedge Fund Rules

Apr 17 2012 | 1:48pm ET

British hedge fund managers who have fled to Switzerland are in for a rude surprise.

The country that practically invented the terms "off-shore" and "light-touch" is preparing to have a much heavier hand when it comes to its alternative investment funds. If formerly U.K.-based hedge fund managers thought they could skirt tough new European Union regulations—they should think again. Switzerland plans to match them.

The country's Finance Ministry said its parliament will begin debating new rules to bring Switzerland into line with impending EU rules—Switzerland is not a member of the 27-nation bloc—this year, and that the new rules will take effect next year.

Why the change? Switzerland fears that its growing funds industry will be shut out of EU markets when the bloc's new Alternative Investment Fund Managers Directive takes effect. Those regulations could block any foreign manager whose local jurisdiction doesn't meet EU regulatory standards.

For Switzerland, that means the number of regulated managers could grow more than six-fold, to almost 600, one Swiss lawyer told Bloomberg News.

It's unclear what effect Switzerland's decision will have on its hedge fund industry. Many of the British funds and managers who relocated to the country did so more to avoid new, higher British taxes than impending EU rules. And if they move to remaining light-touch jurisdictions, such as Monaco or the Channel Islands, they could find themselves locked out of the EU.

The change may have a bigger effect on the Swiss themselves: Switzerland, despite having a population smaller than New York City, is one of the wealthiest countries in the world and is home to a large number of hedge fund investors, who, paradoxically, could be shut out of Switzerland if they fail to meet the stringent new requirements.

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