Despite geopolitical risks and tension in Ukraine, hedge funds put billions in Russian stocks during the first quarter of 2014. Among the largest buyers are Renaissance Technologies and Citadel Advisors, two funds located in the United States.

Targets of investment, among many others, are Telesystems (NYSE: MBT) and VipelCom (NASDAQ: VIP). Both are large telecommunications companies with major operations in Ukraine and Russia that are listed on the U.S. stock exchanges.

Many hedge fund managers believe that Russian equities had attractive valuations before the crisis in Ukraine, and have now dropped even further below reasonable levels. “The markets in Russia and Ukraine are deeper than other countries where there’s been political tension and also extraordinarily cheap.” said Peter Rup, the chief investment officer at Artemis Wealth Advisors LLC which is located in New York and manages the investment US$800 million.

Although Russian stocks and the ruble have recovered from their recent lows, hedge funds that previously had a large allocation toward them have suffered heavy losses. Prosperity Capital Management, which is based in Moscow and one of Russia’s biggest hedge fund operators, has lost 16.2% on their Russian Prosperity Fund during the first quarter of 2014.

Despite this, Prosperity does not yet plan on reducing its exposure to Russian stocks. Alexander Branis, the company’s chief investment advisor, believes that the selloff may have been too much and does not expect any further sanctions, and a subsequent decline in the stock market, unless Moscow decides to advance its military into Ukraine.

But not everyone agrees. Head of options at III Associates Deep Kumar believes that further sanctions are coming, which will have an effect on markets. “So far, it’s been relatively mild. But I think if there is going to be wider impositions of sanctions, which I think is the program they’re speaking of, in the next phase of the sanctions it would be much more severe,”.

“And if that were to be imposed, I think there would be implications for global growth and implications for asset market valuations or stresses, banking stresses to develop. I think all of those could start to come into play and asset markets would get hit in that situation,” said Kumar.

Sanctions imposed on Russia so far include travel bans and asset freezes against some of the country’s senior politicians and restrictions made from U.S. credit card companies Visa and Mastercard. Further sanctions were threatened by both Europe and the United States if Russia moves its troops to seize more of Ukraine.

 

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