Sunday, June 20, 2010

Hedge funds in Russia

Do you have local hedge funds in Russia?

Asked by Alexander, Paris

I'll give you just a brief outlook, as there is a lot to say on this dynamic part of the world economics.


Comparing to the US, where the first hedge fund was created in 1949, Russia was a late bloomer to provide conditions for operating hedge funds.

Soviet economy didn't believe in trading, so it was only in 1996 when the first a hedge fund Diamond Age Russia Fund (with assets of over 20 million dollars) was registered in Russia. As the site of the company says, the fund's investment objective is to generate maximum (absolute) long-term USD capital appreciation through an actively-managed, concentrated, hedged portfolio of Russian and Russia-related securities. Its activity had its ups and downs but the fund has managed to stay on the surface despite of various events (like local financial crisis of 1998) rocking Russian economy during the last decade. It managed to stay rather unique on the market for a long time but since economy always looks to maximize the profit....many of those investors who were restraining from investing in Russian economy before looking at the performance results quickly considered a change in their plans. Since mid of 2000-s investments in Russian showed stable returns and immediately the country was considered by those funds whose investment strategy was based on investing in highly risky but also highly profitable emerging markets economies (up to 25% of return comparing to 11% of other types of hedge fund strategies) .
As you can see from the table below almost all hedge funds (with Emerging Markets investment strategy) in 2009 over performed the previous year (first column 2009 results, second column 2008)

Experts suggest that last years Emerging markets hedge funds drew in over $9bn in new assets. This is more than was investing in this area 5 years ago when only $3.3bn was put into these types of hedge funds.


According to Russian legislation published in 2007 (Federal Law of the Russian Federation "On the Securities Market" and Federal Law of the Russian Federation "On the Investnment funds"), the hedge-fund is an investment partnership which can invest in not only securities (actions, bonds, etc.), but also in derivatives (options, futures), precious metals, as well as very risky investments, such as, for example, purchase of football club or objects of art.
These funds operating in Russia must be managed by professional professional managers or operating companies which obtained a license of Russian Federation.
Thus the asset's structure of Russian hedge-funds is determined by local legislation, as well as who can be considered eligible for to become investor of a hedge fund:

  • One who owns securities and (or) other financial tools of total cost no less than 3mn RUR;
  • One who has an operational experience in Russian and (or) foreign company which worked with securities and (or) derivatives;
  • Performed quarterly within last 4 quarters not less than 10 deals with securities and (or) other financial tools which cumulative price for specified time has been not less than 300 thousand RUR, or concluded within last 3 years not less than 5 deals with securities and (or) other financial tools which cumulative price has made not less than 3 million RUR.

The most important criteria of abowe list is the last one - a prove to have necessary funds at the investor's disposal.

Of cause it will be unfair to say that hedge funds are easily accepted to work on Russian territory. Recent events during the process against local lawyer of London-based Hermitage Capital Management fund (who died in prison waiting for the trial) showed that Russian legal system is still vulnerable and confirmed that Russia is a real emerging market country with all following consequences and constrains.


As for today there are 6 hedge funds operating in Russia.

One of which is Prosperity Capital management (from top 30 European hedge funds classification) which currently has $4.1 bn under management and owns shares of many Russian and ex-USSR companies.

The others have less assets under management but they definitely will try to profit from post-crisis economy recovery.


The shortage of local hedge funds are definitely compensated by the interest of local people ))))))....or those who are concerned by business intelligence (like recently (June 2010) accused of spying in Russia's favor US based personal assistant of the CEO of London-based hedge fund Navigator Asset Management Advisers, Ms.Anna Chapman, for example)

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