And within that the notional amount of credit derivatives traded in London multiplied by more than 100 between 1997 and 2006. While the US remains the main centre of the hedge fund sector, at the latest count twelve of the world’s largest 50 hedge funds were based in London, as against only three in 2002. London has a share of nearly 80% of the European based hedge fund market, up from around 70% in 2002. The UK private equity market has been another prominent area of growth recently. UK private equity funds raised in 2005 were over £ billion, around twice the size of the previous peak in 2001, with the UK private equity industry accounting for over 50% of the total European market. The drivers of the City’s recent growth In part the City’s recent growth reflects – as it did a century ago – a rapid growth in international trade and financial liberalisation. Globalisation has brought an expansion of world imports by 180% since 1990 compared with an 80% increase in world GDP. Progressive upgradings of a number of emerging economies have broadened and deepened international links. Higher savings in the emerging Asian economies, in particular, have combined with demographic change in the West to increase demand for long-term savings instruments and a fall in their yields. 10 All these trends taken together have led to a period since 2002 of unusually high returns for holders of many financial assets and the explosive growth in new products and markets.
To the extent that the UK’s industry may be relatively efficient and competitive, we may even have fewer people engaged at this end of the business than some other countries. While in 2003 the share of Gross Value Added from financial intermediation was a little higher for the UK than for France, Japan or Germany (5%, 7% and 4% respectively) there was not that big a gap and the figures for the US were about the same as the UK (8.5%). It is London’s position in the wholesale and international markets that is special and it is harder to get a handle on that. A recent estimate put the total number employed in “City” jobs at around 320,000. 4 There are other significant European centres in Paris and Frankfurt and, within the UK, in Edinburgh for instance. But London is estimated to have 75% of UK's wholesale financial jobs and to be the largest European centre for wholesale finance with 35% of the jobs (up from 30% in 2000). So by this measure those working in “City” represent a little more than 1% of the UK workforce. While this is estimated to be twice the equivalent proportion for Germany and three times that of France, we should not get it out of perspective. The economic geography of financial centres Geographical concentrations, clusters, are common in many industries. In some cases they reflect the availability of raw materials or power sources. Elsewhere the underlying reasons are not so obvious.