Remote working could accelerate a regionalisation of the US hedge fund industry
By Joel Press, Press Management – Zoom has been the ultimate success story for 2020 as firms, globally, have adjusted to remote working. If I think about what the next best thing to Zoom will be, I would say it needs to be something that gives you the ability to walk into someone’s computer just as easily as walking into their office. At the moment, my experience of Zoom is that everything is still formalised and diarised…I’ll talk to you at 10am, let’s set the meeting for 5pm. What’s wrong with doing a quick meeting at 10.15?
It still feels a bit regimented, in that regard. But Zoom and other platforms like Microsoft Teams have at least shown fund managers a glimpse into the future of how we might all be working. In the past months I have noted that firms have managed to transition far more seamlessly than they might have anticipated to being able to efficiently collaborate with their entire team connected only by their screens and telephones.
One idea to help create community is conduct “office hours” on Zoom. When we are in our offices we are able to be seen either at our desk that may be in an open environment or if in a office through the glass walls. Anyone can see you as they walk by. Those spontaneous conversations are what is missing by members of the team working independently, remotely. Why should working outside of the office environment mean that no one can see us unless they arrange in advance and schedule it?
In theory, having “office hours” would allow your team to know you are available. If someone wanted to chat they would need to “Knock” and be let in. This I believe would create better dialog and help create a sense of community. Technology will be tweaked to allow those on the team working remotely to have the experience of being together if we can make access feel less formal. This is one idea, and I am sure over time as we continue to work remotely, there will be other ideas.
We have to make sure that we satisfy our needs as humans to connect, to mentor, and to build relationships. That is key to creating and maintaining a firm’s culture.
For the time being, the fund managers I’m speaking to don’t plan on their entire teams physically back to their New York City offices until the spring, summer or even the fall of 2021. And I don’t think we’ll see a return to any sort of normalcy, on the back of a vaccine, for at least another year. In the meantime, many employees are enjoying the balance in their lives of spending time with their families, additional space if they have left their city residences for different locales, while still being able to continue their roles in their firms.
The big question for fund managers to be asking themselves now, is “What do we do next? Do we maintain an office in New York, but work semi-permanently in the short-term out of satellite offices Westchester or Greenwich? Will satellite offices become more the norm as fund employees tire of working from their homes with distractions but have gotten accustomed to the efficiency of not losing two or three hours a day to commuting?
This brings up an interesting consideration in respect to tax.
If Joe Biden’s tax policy is made manifest – potentially raising the level of wages subject to Social Security tax and increasing tax rates on the wealthy – it may lead to a shift in demographics in terms of where financial professionals live. While employees do not have an option to avoid federal income taxes, they can change their lives to move to lower tax rate states.
What makes this world so different today is this: in years past, wealthy families who left the tri-state area of New York/New Jersey/Connecticut, which is a high tax area, to live in lower or non-tax states did so because it was the right time in their lives; the kids were in college, they were getting towards the end of their careers.
Now, however, with the pandemic, younger professionals are opting to leave the cities to raise their families in a different environment and have a different quality of life, in addition to potentially paying less tax (with respect to their hedge fund businesses).
I know the CFO of one multi-billion hedge fund who is moving to a Florida suburb and he will work in a completely virtual way.
New York City will always remain a key financial centre, just as London and Paris will, but things will be different. The ‘hub and spoke’ model is going to become more pronounced. Certain kinds of services like prime brokerages are going to remain the hub, but the spokes, the actual fund management and operations, will extend further away than we’ve seen in the past.
In the early years of Wall Street, all the way up until the 1970s, financial firms could not operate their back offices past John Street in lower Manhattan. The front office was allowed to move uptown but the back office, which handled the movement of physical securities, could not move to mid-town Manhattan, it would take too long for the runners to deliver securities .
This is how Wall Street became the ‘hub’ of the city’s financial sector.
Neuberger Berman, which some people might not realise was the first ever prime-broker, bifurcated their office and moved their investment management and administration to mid-town Manhattan.in the mid 70’s. A brokerage house called Edward & Hanley was based in Long Island but they had their back-office in Wall Street. They had to by law.
Fast forward to today, when physical securities are no longer being transferred around lower Manhattan by runners but instead securities move electronically, and there is no physical need or legal requirement that a brokerage firm maintain a physical office within a few blocks of an exchange. There will be a different look and feel in the city after this pandemic, as fund managers change their trading arrangements and base themselves outside of New York.
The regionality of the US hedge fund industry will change and the hub and spoke will become more global. If it weren’t for local laws being so diverse, by country, we would already have a more globalized market.
As any New York City based hedge fund manager knows, they have to pay a 4 per cent Unincorporated Business Tax.
Right now, the decision makers of the HFs and some employees of these firms aren’t operating in New York City. Do they need to continue to pay UBT while their operations are remote and their physical offices are closed? I believe the answer should be “No” although New York State and City will strongly argue that the businesses are still New York City based, regardless of the Covid-19 disruption to the workforce.
I strongly suggest that anyone thinking of not paying UBT should consult their advisors to helped them make this decision.
Connecticut became a favourable place to do business in the early 90’s when the state eliminated their business tax. As a result, a hedge fund centre was created when many fund managers with homes in Greenwich and Westchester decided to open their firms in Greenwich and Stamford with easy commutes for them, and near train stations that made it palatable for their employees living in Manhattan to make reverse commutes.
Over the next few years, who knows how many more Connecticut-like hedge fund centres might emerge, as hedge fund employees, and therefore fund operations, move away from New York City?
It’s quite likely the spokes of the wheel will continue to extend outwards, with managers moving to Florida, Texas and other non-tax states. Several large funds have already announced moving their fund headquarters to Florida. This may be the tip of the iceberg.
As we head into 2021, people in this industry are going to feel like they have more flexibility over where they choose to locate, work, and raise their families. The city won’t get abandoned, of course not, but the spokes will get longer and longer post-pandemic. Ultimately, the focus is going to be more on talent and less on location. Why only hire analysts or traders in New York if there are potentially better candidates in Texas, or San Francisco?
When the wave of this pandemic recedes, that’s when we’ll have more clarity on what the longer-term implications will be.
If you’d told me six months ago that the CFO of a multi-billion dollar hedge fund was going to work out of Florida and fly in to New York every six weeks, I would have dismissed it outright. But that’s now become reality.
Thanks to Zoom and other virtual platforms, the genie is out of the bottle. It’s unlikely this industry will ever be the same again.