PARIS/LONDON (Reuters) - The political backlash against investment bankers' bonuses could see an exodus of top traders to hedge funds, which are likely to be less restricted in paying talented managers what they want.
Investment bankers' hefty payouts have provoked public outrage since many of the banks were propped up with taxpayers' money during the credit crisis.
But hedge funds can argue that they should be free from state intervention since they were not bailed out by taxpayers' money and many funds have already benefited from the banks' woes during the credit crisis.
Last week, British finance minister Alistair Darling said banks operating in Britain would be charged a 50 percent tax rate on staff bonuses of above 25,000 pounds ($40,580)..
Darling's plan was backed by France while German Chancellor Angela Merkel also described it as an attractive idea.
"If bonus levels are cut in the UK, then hedge funds can get a competitive advantage. The uncertainty that will be around for at least the next three months isn't going to do hedge fund business any harm," said PricewaterhouseCoopers partner John Terry.
Firms such as GLG Partners, Greylock Capital and Duet Group are among those to have recruited former bankers during the credit crisis.
In America, U.S. President Barack Obama has put pressure on Wall Street firms by criticizing "fat cat bankers" taking big bonuses, while Goldman Sachs has sought to deflect outrage over huge payouts by giving top managers their 2009 bonuses in stock rather than cash..
"The only consequence I can see is more talent coming into the hedge fund business," Gilles Guerin, deputy chief executive of French fund of hedge fund firm HDF, told Reuters.
Despite initial fears the tax would also hit fund management firms, Treasury minister Paul Myners said on Wednesday it would be focused on banking activities.
While hedge funds saw their worst ever year of performance in 2008 and $330 billion of client outflows in the year to June, investors are now tentatively returning to these portfolios and some fund firms are hiring once again.
The fledgling Paris hedge fund industry, which is far smaller than the one in London, could benefit.
Earlier this year, former Societe Generale bankers left to form their own hedge fund called Nexar Capital, which is considering growing by making acquisitions..
HDF's Guerin said it was important France supported the Paris hedge fund sector by not tinkering with existing regulation.
There are a few unanswered questions, though.
PwC's Terry said that bonus cuts for top executives were far from certain as many are already fearful of losing top talent to hedge funds and other rivals.
Having spoken to around 25 major banking groups, Terry said the initial reaction from banks to last week's UK Budget was to bear the extra cost themselves and to pay the top-earners similar bonuses as previously planned.
"For senior people the first reaction is that maybe they'll change it around the edges but they won't make material changes... If they change what they pay because of a tax charge, they'll lose some key people."
Another uncertainty facing hedge funds is a proposal by top European parliamentarian Jean-Paul Gauzes to put the same curbs on hedge fund pay as on banker pay, although the laws are far from final and would not be implemented for several years.
Odi Lahav, vice president at Moody's alternative investment group, said that regulatory uncertainty may act as a counterbalance in the short term but the current trend was in favor of hedge funds.
"All other things being equal, this will cause many talented traders and executives to consider moving into or starting a hedge fund," he said.
David Stewart, chief executive of UK hedge fund firm Odey Asset Management, said the tax on bonuses could help hedge funds' recruitment but added: "Bankers are not necessarily who we want...What's more likely is that the younger generation will drift abroad."
There has been a recent trend for firms to set up shop in Switzerland and one Geneva executive said the Swiss market could be a fertile hunting ground for funds seeking former bankers.
"Switzerland could be well positioned to become an attractive financial center for the hedge funds," said Fabrizio Ladi Bucciolini, who looks after hedge funds for Swiss fund management and private banking firm Reyl.
(Reporting by Sudip Kar-Gupta and Laurence Fletcher, Editing by Sitaraman Shankar)