Russian hedge funds face closure

Date: Friday, October 24, 2008
Author: James Molony, Reuters

Up to half of Russian hedge funds could go out of business as the financial crisis sends investors fleeing and the stock market continues to fall, according to industry experts.

Speaking at the Russia Alternative Investment Summit on Wednesday, Simon Fentham-Fletcher, head of fund of hedge funds at Raiffeisen Bank, said in a worst-case scenario, 50 percent of Russian hedge funds could close.

The primary source of failure will be a lack of funding as performance deteriorates and investors redeem their money, he said.

"If they're not well-capitalised they can't look after themselves properly. It's expensive to run a hedge fund out of Russia and you can eat into your reserves very quickly," said Fentham-Fletcher, who is based in Moscow.

Christoph Kampitsch, head of alternative investments for Erste Bank, said there were about 75 hedge funds operating in Russia but by January next year this number may be closer to 25.

Fentham-Fletcher said the vast majority of hedge funds in Russia were equity focused with only minimal hedging -- positions designed to reduce losses when markets fall -- and as a result had been badly affected by the decline in the stock market.

Russian equities have lost 70 percent of their value since the beginning of the year. "Russia was basically a long-only play with a derivatives overlay and it's still like that for a large number of hedge funds," he said.

"Given the decline in long-only assets the environment is completely bleak," Fentham-Fletcher said.

Hedge funds across the globe have been hit by investor redemptions and deteriorating returns amid global financial turmoil.

In Russia, the picture is just as tumultuous following a period of "rapid expansion" the industry is set for a significant shakeout, Fentham-Fletcher said.

The Russian hedge fund industry has grown rapidly in recent years and many may prove ill-equipped to cope with the pain currently being inflicted, he said.

The vast majority of funds are still less than three years old with "shallow infrastructure", Fentham-Fletcher said.

Now with many investors heading for the exits and perceived safe havens such as cash the future for many hedge funds in the region looks uncertain.

"Funds that do have lock-ups are protected to some degree but investors are just not happy and scrambling to get out. People are happy to pay fees to get out now," Fentham-Fletcher said.

"AUM (assets under management) growth is not going to be around for a while." (Editing by Quentin Bryar)