Anthony Hilton: London's fund managers find hardline regulation endangers creativity

Paul Killik, founder of Killik & Co in the late 1980s, was asked at the recent Wealth Management Association conference whether he would do the same thing again.

His has been one of the more successful launches, so it is no great surprise to hear that he thought he would, albeit a firm today would not be a mirror image of what he created then and he certainly would make greater use of technology, as Nutmeg is seeking to do.

But the more telling part of his replay came when he expressed the view that to launch a new business today would be very much harder.

There are so many more barriers now than there were then.

Fund management firms back in the day did not need to worry about capital, in the sense that there was no requirement for them to have a buffer which would allow them to keep trading long enough to permit an orderly wind-down.

The compliance around knowing the customer, the suitability of investments and the separation of client money was less rigorous.

However, it is not simply that there is a much greater amount of regulation that has to be complied with today.

It is also that the regulatory approach has changed and is today much more adversarial.

When Killik was starting out, which was just before statutory regulation arrived in the form of the Financial Services Authority, he recalls the regulator of the day helping him fill in the relevant forms and guiding him through the process. He found it hard to believe that would happen today.

Coincidentally, in a separate conversation, the chief executive of one of our larger hedge-fund groups makes a similar observation to the more general point that to start a firm like his would be much harder today than 15 years ago.

His experience is that far fewer funds are launched in London today compared with a few years ago.

He believes further that you do not find the same thing in New York. A visitor to the Big Apple will find 50 new funds which an investor would find rewarding to visit; the same investor in London would be pressed to find five new kids on the block whose ideas would be worth exploring. Clearly the US has a reputation even in finance for being more entrepreneurial and this may be what lies behind the seemingly more vibrant scene there.

The unwillingness of investment banks in London to seed new funds which would then trade through them is also a change. And of course the weight regulation may also be a factor.

So what are the implications?

Well the problem for the hedge-fund sector is one of regeneration and reinvention.

It is generally accepted that roughly one in 10 hedge funds cease trading every year, not because they have lost all their clients’ money but because they have not made a big enough impact to attract fund inflows that they need to make the effort worthwhile.

To be healthy, the industry needs a steady flow of new firms coming in to compensate for those dropping out but that appears no longer to be happening.

The problem is slightly different in what one might call conventional fund management but even here it is very unusual for a fund management firm to long outlive its founder.

This is sometimes, as one seasoned observer put it, because “all fund managers commit hara-kiri in the end”.

Actually they do not commit suicide but they get bored or impatient and end up doing something so stupid it destroys their fund and takes them with it.

Even those management groups which avoid that kind of near-death experience, appear to lose momentum and energy with the ageing of their founder and his senior colleagues of the same generation.

Successors, even when carefully chosen, rarely have that same mix of investment flair, hunger, entrepreneurial zeal, the ability to motivate colleagues and the desire for hard work.

There are exceptions but in general few go on to greater things under the second and third-generation leadership.

This matters because the health of a financial centre is very much tied up with its ability to regenerate itself and this also brings into focus work done by Professor Roger Steare, to be found sometimes at Cass Business School and greatly in demand to help boards with their thinking.

One interesting point he makes is command-and-control companies are not well equipped to cope with a fast-changing world.