Volatility Rocks Russia & Eastern Europe-Focused Hedge Funds – August 2014

by Jack Ebbs

  • 13 Aug 2014
  • HF

Russia and some other countries in Eastern Europe have received a lot media attention so far this year. The increased volatility that can often accompany investment in an unstable region means that any potential upsides in terms of returns need to be weighed against the potential for large losses should conditions for hedge fund investments become more unfavourable. 

Preqin’s Hedge Fund Analyst tracks 148 hedge funds that have their investment strategies focused on Central and Eastern Europe, with 88 of these funds including Russia as a geographic preference. Preqin’s Russia and Eastern Europe benchmark achieved annualized returns over the last 10 years of 11.25%, marginally outperforming Preqin’s overall hedge fund benchmark of 10.95%. Despite the similarity of returns over the longer term, the difference in volatility is significant with the Russia and Eastern Europe benchmark almost tripling that of the overall hedge fund benchmark. The Russia and Eastern Europe benchmark’s volatility over the last three years stands at 14.7% versus the All-Hedge Fund benchmark’s 5.5%. 

When looking at Russia and Eastern Europe as an emerging market in isolation, Preqin data shows that the returns for funds in this region were down 9.6% over Q1 2014. However, following four months of back to back losses at the start of 2014, the benchmark posted returns of 7.07% in May (the greatest monthly return since January 2012) and 2.94% in June. Some funds focused on the region were able to post returns significantly higher than these benchmarks; for example, the East Capital Russia Domestic Growth Fund, managed by East Capital Asset Management, achieved returns of 17.08% and 6.78% in May and June respectively. Despite these two strong months, the benchmark is yet to recoup its losses from the start of the year and Preqin’s Russia and Eastern Europe benchmark is still in the red at -1.73% for 2014 YTD.

Current events in Eastern Europe have proven challenging for fund managers to navigate, especially throughout the first half of this year. Despite the brief recovery going into Q2 2014, it will be interesting to see how Central and Eastern Europe-focused hedge fund managers perform throughout the rest of 2014. Especially when the ever-increasing volatility is set to worsen, following recent events in the region that has seen the MICEX Index tumble.

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