West Palm Beach (HedgeCo.net) -The events of 2008 were dramatic everywhere in the world, but particularly so in Russia.  Despite the decline of  – 74.2% for the MSCI Index in 2008, the Pharos Russia Fund produced a positive 3 year annualized return of 1.3% with 24.8% volatility as compared to the MSCI Russia Index.

The Pharos Russia Fund’s 5 year returns also show a strong outperformance against the MSCI Russia Index. The 11 year period of January 1998 through December 2008, which encompasses two market meltdowns and many other mini-crises, the Pharos Russia Fund has returned a total of 100.33%, against a gain of only 3.81% for the MSCI Russia Index. 
 
"Our long history in the Russian financial markets through good times and bad times helps guide our investment philosophy and makes us mindful of the periodic crises that hit the market," Pharos says,  "We seek to maximize our investor’s returns over the medium term, and one of the most important aspects of that is to protect against severe losses in times of crisis."

Their flagship fund, Pharos Russia Fund, has been the most resilient performer in the Russia & CIS universe in 2008 and in January 09, Pharos Russia was up +0.4% whereas the Russian market RTS was down -15.3% and the MSCI Russia down -11.6%.

The market conditions in Russia deteriorated in an accelerating fashion once the May holiday revelry had ended.  The commodity cycle reversed as economic indicators began to reflect the demand destruction caused by the slowing of credit availability.  Waves of deleveraging of the global financial system soon followed.  Russia suffered initially as the commodity focused investors sold positions, and again as investors generally sold down positions to reduce leverage.  The last victim was the Russian oligarch.

By this time, Pharos said, they had adjusted their positions to reflect the bankruptcy of Lehman Brothers and the growing instability of global markets.  "While our overlay gave investors protection against a collapsing market, we realized that the fundamental structure of the markets was changing, and that our risk management concerns had to change."

While this tale of misadventure is unsurprising for an emerging market, it has also become the dangerous reality in the US and other developed markets as well, Pharos said.  "In Russia, there are a few key triggers that we are looking for before investing fully into the market. In past letters, we have identified credit normalization and commodity price stabilization as the two necessary, but perhaps not sufficient, conditions for Russia’s bear market to end.  While we do not expect credit availability to reach the extreme levels of the last few years, basic credit does need to flow again for companies to move out of crisis mode and for trade to resume in a normal manner.  The Russian government has taken admirable steps to deal with the shutdown of credit, and after a slow start is now using the large reserves built up during the commodity boom to supply credit to Russian corporations that need help rolling over their debt."

Alex Akesson

Editor for HedgeCo.Net
Email: alex@hedgeco.net