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Hedge funds investing in Russia plunge amid invasion of Ukraine

As Western sanctions pummeled Moscow’s financial system in recent weeks, hedge fund investors in Russian securities were hit hard by the fallout.

Russian and European hedge funds plunged 36% in the first two months of 2022, according to new data from the industry trade group Hedge Fund Research (HFR). Losses came amid a barrage of economic penalties from the United States and European Union, a collapse in the Russian ruble, and heightened risk of default on Russian bonds.

Before the war, Russia-focused hedge funds led performance among emerging markets hedge funds last year, notching returns of 20.7% in 2021.

The losses triggered an upset for overall performance in the broader emerging markets hedge fund index, which logged a 4.5% drop through February, according to Hedge Fund Research.

HFR President Kenneth Heinz attributed the downturn recorded by these funds to an “unprecedented” spike in geopolitical risk and uncertainty resulting from Russia’s invasion of Ukraine and the subsequent financial consequences, including surging oil prices, punishing sanctions and the possibility of a “catastrophic” default on Russian sovereign debt.

“In addition to the unprecedented surge in geopolitical risk, powerful inflationary pressures continue to rise across global economies, and central banks have begun to increase interest rates,” Heinz said.

In the broader emerging markets hedge funds sphere, funds focused on China also suffered losses, registering a decline of 6.8% year-to-date through the end of February. The index tracking China-focused hedge funds underperformed the decline of Chinese equities.

An interior view shows the headquarters of Moscow Exchange in Moscow, Russia April 27, 2021. REUTERS/Maxim Shemetov
An interior view shows the headquarters of Moscow Exchange in Moscow, Russia April 27, 2021. REUTERS/Maxim Shemetov (Maxim Shemetov / reuters)

Meanwhile, funds invested in Latin America navigated the volatility to advance 4.3% over the first two months of the year.

The HFR's Emerging Markets Index tracks funds that invest in securities of companies or the sovereign debt of developing or "emerging" countries. These regions include Africa, Asia (excluding Japan), Latin America, the Middle East and Russia/Eastern Europe.

Separately, HFR’s Cryptocurrency Index, constructed on investment managers who trade in cryptocurrency directly, dipped 14% during the first two months of 2022 as digital assets weathered a broader setback overall. The index soared 240.7% in fiscal year 2021.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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