Hedge Fund H2O Holds On to Ruble Bets as Exiting Would be a ‘Gift’ to Putin

(Bloomberg) -- H2O Asset Management said it is maintaining its exposure to the Russian ruble in part because exiting its positions would be a gift to Vladimir Putin.

“We consider that selling Russian assets, among which currencies, at such discounted rates is a counterproductive ‘gift' to buyers, among whom the Russian government,” London-based H2O said in a letter to investors seen by Bloomberg News.

H2O sent the letter after two of its funds with bets on the ruble had record losses of more than 15% on Monday amid market turmoil after Russia invaded Ukraine, Bloomberg News reported. The 1.39 billion-euro ($1.5 billion) H2O Multibonds fund and the smaller $50 million H2O Multi Emerging Debt fund declined by at least a further 3.5% on both Tuesday and Wednesday, according to data compiled by Bloomberg.

Coming into February, the Multibonds fund had 48.3% of gross exposure in the ruble, according to an investor document seen by Bloomberg.

The March 3 letter addressed the performance plunge and said the asset manager was holding on to its Russian currency exposure for a number of reasons, including expectations that the foreign exchange market will keep operating and that the ruble is more likely to rise than fall. H2O also told investors it believes its positions are hedged by other market movements.

“We have previously experienced periods of decline during local/regional shocks,” the letter said. “This crisis bears the same financial characteristics, unlike the Covid crisis, which was of a systemic nature. Current events do not call into question our central scenario, although we are reassessing the situation daily in case the situation escalates.”

Market Turmoil

Russia's invasion has sparked market turmoil as international sanctions begin to isolate the country. Some large asset managers, including Amundi SA and Schroders Plc, have called Russia uninvestable and said they're stuck holding securities that are impossible to sell.

While H2O is keeping its ruble holdings, it has cut its exposure to Russian debt. That now stands at between 0% and 1.5% of the funds, according to the letter. It does not hold any Russian or Ukrainian equities.

Natixis SA has been a long time shareholder in London-based H2O, co-founded by Bruno Crastes and Vincent Chailley. The French bank is attempting to sell its stake back to management after the asset manager was rocked by controversy.

In the fall of 2020, the firm froze the trading of several funds because of valuation uncertainties due to a large exposure to thinly traded securities linked to German businessman Lars Windhorst.