This content is from: Portfolio

Russian Hedge Funds Come In From The Cold

With all eyes on Russia, one fact has gone overlooked: the country's economy has been steadily improving, and some hedge funds are benefiting.

  • Imogen Rose-Smith

High on the list of factors likely to impede economic growth are sanctions (which is, of course, the point of sanctions) and, for commodity-rich countries, low oil prices. Throw in a high-profile global dispute over allegations of interference in foreign elections and internal fights over civil liberties, and it should be safe to assume that a country facing so many headwinds would be suffering from a poor economic outlook. Not so for Russia right now.

After cratering post-2008, the Russian economy has been on a slow climb back. The past two years have showed gradual improvement, including a strong finish to 2016. Among the beneficiaries of this trend are hedge funds who specialize in the country.

The U.S. dollar-denominated Russian stock index ended 2016 up 40 percent, trouncing its international peers, while the ruble-denominated MICEX hit an all-time high of 2285.43 in January. Two Russia-focused hedge fund firms, Firebird Management and Prosperity Capital Management, both have funds that are among the top hedge fund performers in a weekly hedge fund performance report published by HSBC’s Alternative Investment Group.

New York-based Firebird specializes in publicly traded equities of companies operating in the former Soviet Union and Eastern Bloc countries (it also has funds that invest in Mongolian securities and two private equity funds focused on the Baltic States.) As of mid-February, Firebird’s New Russia fund was the second-best-performing fund tracked by HSBC, with a gain of 8.43 percent. That same fund was the sixth-best-performing fund in the HSBC report for 2016, with returns of 42.27 percent for the year.

Founded in 1996, London-based Prosperity is one of the largest, and oldest, Russia-focused investment firms, with $3.6 billion in assets under management. It focuses on companies in Russia, Ukraine and Central Asia and believes in taking an “active” ownership position. Its flagship Russian Prosperity Fund has an annualized return of 16.5 percent through January 31st of this year. It was the third-best fund in the HSBC ranking for 2016, returning 58.66 percent, in a year where the average hedge fund gained 5.45 percent, according to the HFRI Fund Weighted Composite Index, and the Standard & Poor’s 500 stock index returned 11.93 percent.

It has not all been good times for Russia-focused hedge fund firms. In 2015 Firebird’s New Russia fund lost 11.33 percent, and in 2014 it was one of HSBC’s worst-performing hedge funds, with losses of 34.59 percent. The Russian Prosperity fund fell 3.1 percent in 2015 and had losses of 43.99 percent.

Investing in Russia can also be extremely dangerous. Former hedge fund manager Bill Browder had made a career out of activist investing in Russian companies until, in 2006, he was blacklisted from the country and denied reentry. Subsequent employees of Browder’s firm, Hermitage Capital, were harassed and subject to intimidation. Then in 2008 a lawyer working for Hermitage, Sergei Magnitsky, was arrested and subsequently died in custody. Since then Browder has been dedicated to fighting for justice for Magnitsky. In 2015 Browder published a book, Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice, outlining his ordeal.