Pharo Management takes a hit from tumbling Russian debt prices

Pharo Management has emerged as one of the highest-profile hedge funds to have been wrongfooted by the Ukraine crisis, underscoring how many global investors were caught off-guard by Moscow’s invasion of its neighbour.

London-based Pharo, which has $11bn in assets under management and is one of the world’s biggest emerging-market hedge funds, held the debt of Russia and Ukraine as the conflict erupted last week, according to people familiar with its positions.

The firm’s $5.2bn Gaia fund lost 10.7 per cent last month, while its $4.3bn Macro fund lost 2.9 per cent, the people said. Gaia has suffered only one year of negative performance since it launched in 2008 and has annualised returns of nearly 11 per cent. Macro has been down just twice since 2005 and has annualised returns of 9.2 per cent.

Pharo declined to comment.

The losses come as international investors with at least $150bn in Russian securities grapple with how to deal with positions they hold in the region, which have fallen in value sharply and in many cases are now extremely difficult or even impossible to sell. In spite of the build-up of Russian troops on the Ukrainian border in recent months, many fund managers had believed an all-out war to be unlikely.

Funds with more than €4bn in assets have so far suspended redemptions by their investors, with more expected to follow.

Ukraine’s 10-year dollar-denominated bonds have tumbled from 86 cents on the dollar in early February to 26 cents, according to Bloomberg data. Russia’s 25-year external debt, meanwhile, has dropped from 110 cents to just over 20 cents, according to Bloomberg. Both of these prices point to severe default risks.

Pharo, which is headed by former Merrill Lynch trader Guillaume Fonkenell, quickly sold its position in Russia following the invasion, the people said. The firm told investors that Ukraine’s bonds, however, appeared to be lowly priced compared with where they had traded in the past, for instance during a debt restructuring in 2015.

The market shocks from the outbreak of war come during a tough start to 2022 for hedge funds, many of which have been hit by a sharp sell-off in technology stocks as investors reposition for rising interest rates. Hedge funds on average were down 1.8 per cent this year to Monday, according to data group HFR.

Several other hedge funds have been left holding positions in Russia and Ukraine.

London-based hedge fund Amia Capital, a prominent investor in emerging markets such as Zambia, was an investor in Ukraine’s bonds and warrants going into the conflict, say people familiar with its positioning. The fund had suffered mid-single-digit losses this year ahead of the conflict, two of the people said. Amia declined to comment.

And emerging-market investment firm Polunin Capital Partners, also based in London, held Russian stocks including Gazprom, Magnit and Surgutneftegaz as conflict erupted, according to investor documentation seen by the Financial Times.

It told investors that it was writing down the dollar valuation of Russian stocks not currently trading by nearly 57 per cent and said it was looking into the controlling ownership of companies in its portfolio to check for sanctions risk.

It wrote that it had made a “misjudgement” in taking such positions and added that “the global reaction suggests that a line has been crossed which will make it extremely difficult for investors to re-establish confidence in Russia”.

“The worst-case scenario involves an indefinite freeze on Russian assets which would ultimately require them to be written down to zero,” it wrote, although it added that a “more likely scenario” was that the US’s Office of Foreign Assets Control and other agencies allow investors to reduce exposure to Russia over time.

Polunin did not immediately respond to a request for comment.

laurence.fletcher@ft.com