Man Group’s Contrarian Ruble Bet Pays Off as Hedge Funds Rush In

Updated on
  • Speculative bets go long for 25th week in world-beating rally
  • Carry trade holds its appeal for Osses seeing appreciation

Backing the ruble seemed like a lonely bet for Man Group Plc’s Guillermo Osses five months ago, but now the strategy is paying off -- and the rest of the market is racing to catch up.

The head of emerging-market debt strategy at the company’s Man GLG unit has been bullish on the Russian currency and local debt markets since at least February, arguing that stabilizing oil prices would end the ruble’s slide and curb inflation in the world’s largest energy exporter. Both those things happened, and a shift in speculative bets followed: hedge funds have been bullish on the ruble since late January, the longest streak in a year.

“The combination of carry, currency appreciation and capital appreciation is possible even after the run that local currency denominated assets have had since February,” said Osses, who works in an investment unit of the world’s largest publicly-traded hedge fund firm.

The New York-based money manager was an early entrant into what became the world’s best currency rally, with a call around the time the ruble traded near a record low. Back then, Russia’s oil-dependent economy was financing itself through a combination of central-bank loans and draining its sovereign-wealth fund because international sanctions curtailed its access to foreign capital markets.

The ruble has gained 21 percent since the start of February, the most among 150 currencies tracked by Bloomberg, and is up 34 percent from its all-time low of 85.999 per dollar on Jan. 21. It traded at 64.05 at 4:28 p.m. in Moscow. Dollar-funded carry trades buying rubles have generated the highest returns in the world after those in Brazilian reais. Even after a 0.5 percentage-point cut in June, Russia’s main interest rate is 10.5 percent, compared with close to zero in the U.S.

“I see more room for the ruble to appreciate on the back of oil recovering back up to around $50 per barrel,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm. “The current attractiveness of the ruble is based on oil having stabilized and the currency’s high carry.”

Short Lived?

Others see the ruble’s world-beating rally as short-lived. After climbing from about $27 a barrel in January to above $50, Brent has now dipped back below that level amid speculation the U.K.’s Brexit vote will sap demand, even as producers continue to flood the market.

Landesbank Berlin Investment money manager Lutz Roehmeyer, who stocked up on ruble assets in April, has now become cautious because he says the oil rally is ending. The median of 35 forecasts in a Bloomberg survey sees the ruble sliding about 5 percent to 67 per dollar by the end of the year.

Yet hedge funds and other large speculators have been long on the ruble for 25 weeks and are about the most bullish since February 2013, according to the Commodity Futures Trading Commission in Washington.

Domestic signals point to recovery and more stability: Russia’s economy is expected to emerge from a two-year recession while the nation’s central bank resumes rate cuts after almost a year to reignite growth. Implied six-month ruble volatility -- a measure of anticipated price swings -- has fallen to about 18 percent, the lowest level in a year.

“Russia is one of the places where we find attractive local rates, and it’s one of a handful of markets where we have local rate exposure,” said Morgan Harting, a senior portfolio manager in New York at AllianceBernstein Holding LP, which oversees $487 billion. “You have room for capital appreciation on top of the interest-rate difference, and this is attractive as we’re in a muddle-through economic environment across the globe.”