Mila Kletsky outlines birth of the Russian hedge funds industry
Mila Ketsky, professor at the Russian Presidential Academy of National Economy in Moscow, outlines the development of the Russian hedge fund industry.
The first hedge funds emerged in the Russian market back in 2005-06, triggered by the fantastic boom on the Russian stock market, the very rapid market growth and lack of appropriate legislation.
This favourable coincidence of macro-economic events allowed those “newborn” hedge funds to entice investors with unbelievable gains, sometimes as high as 100% per annum.
They were primarily established by expat professionals who took this chance to leave their existing jobs in a rapid and timely manner in order to set up their own investment companies and hedge funds.
They were followed by those Russians who had gained enough necessary skills while working in Western investment companies or banks operating in Russia.
They also readily joined the trend. Some of them established very specific, Russian style “hedge funds” in the country. Others set up Western style hedge funds in various offshore jurisdictions in partnership with their Western colleagues.
The Western investors that were familiar with the situation on the Russian market could not help taking this once-in-a-lifetime opportunity to profit from the enormous boom on the local market.
Of course, in such a volatile and premature market, they could only entrust an issue as sensitive as their investment to the familiar, Western investment vehicle with Western management.
But unfortunately there was no chance the Western hedge funds that were not already operating in Russia would fit the local requirements. Although intrigued by the Russian boom, they knew nothing about the local market.
These investors had no choice but to invest in the “newborn” hedge funds, and only in those that addressed the basic requirements. That is how today’s hedge fund industry in Russia was launched.
The model of operation of hedge funds in Russia still does not match the models of Western rivals for many reasons.
Due to Russian legislative requirements these funds resemble mutual funds in the West rather than real hedge funds, like Bridgewater Associates, Long Term Capital Management, GLG Partners etc.
In fact, to be more precise, Russian hedge funds can practically be viewed as mutual funds that have been granted the permission to use some additional instruments in the investment process.