London may yet supplant New York as the world’s financial capital. But it still has a long way to go, if the $1.5tn (Rs63 lakh crore) hedge fund industry is any guide. London has doubled its market share of hedge fund assets under management in the last four years, according to International Financial Services, a London-based consultancy. But at 21%, it is still only half as big as the 42% run from New York and Connecticut.
Some UK politicians might interpret the trends as an invitation for the government to support the momentum. It’s a rapidly growing business, after all, and foreign competitors are nipping at the UK’s heels. For example, the Swiss finance minister, Hans-Rudolf Merz, is thinking about a tax cut aimed directly at hedge fund managers. Nor can US indifference to global market share losses—from 83% to 65% in four years—be taken for granted.
But London is already very friendly to hedge funds and their affluent managers.
The city offers a fairly large collection of overpriced real estate, as well as an ever-growing collection of gourmet shops. More substantially, UK regulation is friendly and taxes on both funds and managers are already low, in large part thanks to offshore financial structures.
The question of whether what’s good for hedge funds is ultimately good for the country has not yet been answered completely. The assets that come with hedge funds help the UK’s capital account, but these leveraged investors also add risk to financial system. If there is a major incident, costs of clean-up, which would be likely to fall disproportionately on the home country, could be significant.