Hedge Funds Steer Clear Of Eastern Europe |
Date: Wednesday, February 25, 2009
Author: Forbes.com
2008 was a bad year for hedge funds that invested in Eastern Europe and Russia, forcing many to abandon the region. A month into the new year, they are still steering clear of the market and waiting for more attractive cheap buys to emerge.
"Most funds are waiting to see
what happens, looking for distressed asset opportunities toward the end
of the year," said the director of a London-based hedge fund, which has
been investing in the region. "Potentially there are quite a few funds
that could reorientate toward the region but mostly people are managing
redemptions and waiting to see what happens," he told Forbes.
According to the fund manager, Ukraine, Russia and Kazakhstan's
industrial and resource sectors were likely to be among the first areas
re-entered.
"The key strategy we have reverted to last year was to raise cash and
not be in the market," said the manager of another London-based fund.
"The road for Eastern Europe is still fraught and we see more economic
pain and troubles with external borrowing, which leave the area worse
off than Asia during its crisis."
The funds' caution is unsurprising: In 2008, hedge funds investing
in Eastern Europe and Russia had -- as a group -- the worst performance
in what was the most difficult year for emerging market-focused hedge
funds for 11 years, according to data published this week by Hedge Fund
Research. Funds focused on that region lost 57.7% over 2008, and an
additional 6.8% in January, according to the data. That compares with
the 37.9% drop overall in emerging market focused hedge funds in 2008,
and 1.9% in January.
Ken Heinz, president of Hedge Fund Research, believes that in the
region, hedge funds difficulties have been exacerbated by the heavy
structural impact that the collapse of financial markets has had on the
economies. This has forced, for example, the Russian central bank to
gradually devalue its currency, while political instability has added
to the mix. "2008 and was a very tough year for hedge funds, and the
trend is continuing," he told Forbes.
However, he believes the funds will emerge, noting that in the 12
months that followed 1998, another difficult year that sent investors
scurrying, the region returned 23.0% for investors.
Eastern Europe and Russian markets tumbled in the second half of last year, as the freezing up of credit markets devastated their economies, heavily dependent on borrowing in foreign currencies. Even those funds that have more selective strategies, such as counting on the fall of currencies like the zloty, have been hurt by volatility. On Monday, for example, several Eastern European currencies gained following a coordinated intervention by their central banks.
"There are a few opportunities for short-term profits, but no one wants to buy them because of the risks," said Nigel Rendell, senior emerging market strategist at RBC Capital in London. "There may be opportunities for vulture funds but we are not yet there," he said.
When the re-entrance into Eastern Europe does happen, one thing firms will want to focus on is their strategy of focusing on equity hedges: profiting from buying undervalued stocks and selling overvalued ones. Hedge funds investing in emerging markets have been far more focused than those involved in more developed markets on equity hedges, leaving them more vulnerable to market movements. Last year, 59.9% of emerging market hedge fund assets were invested in equity hedges, against 32.0% in the rest of the industry, according to Hedge Fund Research data.So deep are the troubles of Eastern European economies, and the Baltic states in particular, that analysts are warning they could pose a major problem for Western banks such as Unicredito
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