Israel seeks to become finance hub

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Sitting in his office overlooking the Mediterranean, Tal Keinan, who three years ago founded Tel Aviv-based hedge fund KCPS, paints a bright future for Israel’s finance industry.

“We feel like we are at the cusp of a revolution,” says Mr Keinan, whose firm has grown rapidly and now employs 32 fund managers occupying the entire 30th floor of a landmark skyscraper not far from the city’s beaches.

His excitement is shared by bankers, traders and other fund managers in Tel Aviv, and the optimistic feeling has reached the government in Jerusalem. With the country’s capital market already largely liberalised thanks to a batch of reforms dating back to 2003, the government has now set its sights on a far more ambitious goal: it wants to repeat Israel’s success in building a thriving high-technology sector and establish the country as an international financial centre.

Yarom Ariav, the director-general of Israel’s finance ministry, heads a special committee charged with achieving this. The Ariav Committee, drawn from government, academia and the industry, is due to present its policy recommendations in August.

“I don’t think we can be like Singapore or Ireland or Switzerland,” says Mr Ariav. “We have to develop our own model, [but] the final goal is to build up the capital market and become a financial centre.”

The thought of running a hedge fund out of Tel Aviv – let alone of Israel as a new finance hub – would have been laughable a few years ago. Israeli law made performance fees impossible; foreign investors in Israeli funds were taxed twice; and domestic pension funds were forced to invest all their money in special, non-tradeable government bonds.

Analysts and industry insiders agree the country’s regulatory and tax regimes still fall short of US or UK standards, but say they no longer present a serious stumbling block. “There are things we can improve,” says Mr Keinan, “but the binary shift from impossible to possible has occurred.”

Mr Ariav concedes Israel is not the only country trying to reinvent itself as a financial centre. He also admits it may not enjoy quite the same advantage in finance that it did in high-tech, a sector that benefited immensely from the country’s intense research and development in the military field.

“I know financial services are not the same thing, but both [high-tech and finance] are based on human capital and here Israel does have an advantage,” says Mr Ariav, pointing out that Israeli universities produce a wealth of “talent in areas such as maths, statistics and finance”.

Mr Ariav and Mr Keinan also stress that there has never been a shortage of Israeli finance professionals, just that until very recently they could be found everywhere but Israel. Now a growing number of bankers, traders and fund managers are moving back, either for family reasons or simply because, for the first time, they can find high-calibre jobs at home.

Mr Keinan sees their return as a unique chance for companies such as his. “We could never afford to get this kind of talent under one roof in London,” he says before reeling off the former employers of his staff, such as Deutsche Bank and JPMorgan.

Some argue that Israel’s real competitive advantage in finance lies not so much in fund management, but in a fast-growing niche where the country can use its proven skills in high-tech and software development. One such example is a company, based in the same building as KCPS, which develops software used for options pricing.

Eugene Kandel, a professor of economics at Hebrew University and a member of the Ariav Committee, says other Israeli companies specialise in writing software for algorithmic trading, but “there is no industrial policy here. In the end the market will decide what works and what doesn’t.”

Caught up in the soaring ambitions, it would be easy to forget just how far Israel’s financial services market still has to go. The retail banking market, for example, remains highly concentrated and uncompetitive. Even with the flurry of recent returnees, there are probably no more than 15 hedge funds operating out of Israel today.

Overall, financial services still account for a much smaller share of gross domestic product and jobs than in other developed economies.

“We are not going to become the powerhouse in financial services that we are in high-tech,” cautions Prof Kandel. “We are much more interested in finding niches that we can be very good at, and in increasing financial services as a share of GDP by 60 per cent or more. That’s very ambitious. But it’s doable.”

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