The financial market in 2024 is experiencing distinct trends across the UK, US and Dubai, especially in the fund management space. In the run up to the US election, Fund HQ has been observing key trends and challenges emerging across these major financial markets.
Each market is shaped by local regulations, political shifts and investor sentiment. Here’s what we’re seeing from a fund management perspective across these regions.
UK: Post-Brexit, New Labour Government, and Rising Barriers to Entry
The UK financial landscape is grappling with the long-term effects of Brexit, particularly in relation to cross-border marketing and fund management. Since the UK is no longer part of the European Union, hedge funds and asset managers face significant obstacles and costs when marketing to European investors.
The requirement to be associated with an EU entity complicates the process and many UK-based managers are exploring solutions like secondment into EU entities. However, this remains a grey area, with little guidance from regulators, leaving firms in a state of uncertainty.
Furthermore, in addition to the much-mentioned likely tax rises for all with the new Labour government, the rescinding of non-dom status in the UK has introduced new tax burdens on non-residents, discouraging potential fund launches. The increased cost, combined with tightening regulations and difficulties raising capital, has led to fewer smaller hedge fund managers launching in the UK.
The upcoming October 2024 budget, expected to address corporate tax, capital gains tax and income tax, could create further headwinds for private equity and hedge fund managers looking to pay themselves dividends.
Cyprus is emerging as an alternative hub, with firms eyeing relocation in light of political uncertainties in the UK. A Cyprus-based solution might offer more favourable tax and regulatory conditions for businesses, particularly for managers frustrated by the UK’s ever more burdensome fund landscape. However, recently the FCA has been tasked by the Treasury to update their attitude and culture to both regulation and new launches in order to make the UK more business friendly.
US: Tax-Driven Migration and Political Instability
In the US, fund managers face their own set of challenges. This year we’ve observed a decline in fund launches, with political instability contributing to a generally cautious sentiment. In early 2024, only 146 new hedge funds were launched, an increase from the prior quarter but still modest relative to historic trends. [Hedge Fund Research (HFR) Market Microstructure Report, Q1 2024]
The current tax regime and the rise of regulatory scrutiny have encouraged several managers to relocate to more favourable jurisdictions. Miami, for example, has become an attractive destination due to Florida’s tax advantages.
For those seeking more significant tax relief, Puerto Rico offers even more compelling incentives. Its Act 22 (Individual Investors Act) and Act 20 (Export Services Act) provide US citizens with the opportunity to significantly reduce their tax liabilities, creating a pull for fund managers and investors alike.
The struggle to raise capital is also a common theme in the US. The economic climate, combined with political uncertainties, has led many investors to adopt a wait-and-see approach, resulting in fewer fund launches compared to previous years.
Dubai: A Rising Star for Fund Managers
In contrast to the challenges faced in the UK and US, Dubai has emerged as a rapidly growing hub for the financial sector. The city’s openness to business, combined with its favourable regulatory environment, is making it an increasingly attractive destination for fund managers. Some smaller managers, who are increasingly struggling with the UK’s stringent regulations, are choosing to launch in Dubai, adding to its growing financial ecosystem.
Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) have been rolling out both the proverbial “red carpet” to managers as well as initiatives aimed at simplifying the regulatory processes for fund launches, while offering tax incentives that appeal to international managers.
We’re seeing a trend of managers, particularly those frustrated with the FCA’s expensive and very slow application process (9-12 months average) together with their seeming hostility to small launches , considering Dubai as an alternative for launching their funds. Dubai’s ability to provide faster time-to-market and lower operational costs makes it a very appealing option for new or re-locating hedge funds and private equity firms.
As a result, Dubai has seen a surge in fund launches in recent months, with the region’s appeal being further boosted by its strategic position for accessing both European and Asian markets.
In 2023, DIFC recorded a 125 per cent year-on-year growth in the number of hedge fund managers establishing in the centre, according to the Dubai Financial Services Authority’s (DFSA) annual results. Approximately two-thirds of DIFC-based hedge funds originate from the US and UK, including two of the world’s 10 largest hedge funds. [Dubai International Financial Centre]
Summary
Each market is responding differently to the shifting global financial landscape. In the UK, Brexit, the new Labour government, an attack on non-doms, and regulatory challenges are making it harder for new fund launches, while in the US, tax-driven migration and political uncertainty are shaping decisions.
Meanwhile, Dubai’s pro-business stance is opening the door for fund managers to set up quickly and efficiently. For fund managers navigating these markets, the key to success will lie in understanding the specific regulatory environments, tax implications and investor sentiment unique to each region.
At Fund HQ, we remain committed to helping our clients navigate these challenges, offering insights and strategies tailored to each fund, as well as the manager’s requirements taking into consideration the ever-changing financial landscape. Fund HQ is agnostic to manager jurisdiction. Our current manager client base is majority UK domiciled, but we also have manager clients in the US, Switzerland and Germany.
