Hedge Fund Report: Betting It All on Russian Gas

Speculation can take different forms. You can reach for big returns in far-flung lands, invest in sectors with a lot of historical volatility, or eschew diversification by betting all your money on a single stock.

Gazinvest, a hedge fund based in the Bahamas, does all three. The $16 million investment vehicle exists simply to bet on Gazprom, the Russian gas monopoly whose shares are mostly off limits to foreign investors. Gazinvet's manager, GEM Global Equities Management, a $250 million emerging markets shop, claims the fund has returned 150% this year through October.

Gazprom has a small presence in U.S. markets. Just over 3% of its stock is represented by American depositary receipts that trade over the counter on the pink sheets. The rest of its float trades in overseas markets that are inaccessible to U.S. investors, although that is expected to change someday when the Russian government makes good on a pledge to liberalize the ownership rules. Since Gazprom's ADRs trade at a 20% premium to their local-market counterparts, many speculators expect to see a pop when the ownership door swings open.

Enter Gazinvest, which claims to use its contacts with local brokers and derivatives to build an economic interest in the stock. While costly from a tax and fee standpoint, the strategy could pay off if and when the stock gets a wider constituency. Ender Oztas, a principal with GEM based in Istanbul, predicts that "Gazprom will be one of the biggest emerging markets stocks tradable by international investors."

For now, Gazinvest has ups and downs. Last month, the fund had a negative return of 11%. "This was a correction after the stock jumped up in September," says Oztas. Its history is similarly volatile. Since its September 2003 founding, the fund has gone from $10 million in assets to a peak of $70 million last year. Its current size is less than half its assets at the start of the year, a decrease that reflects investor drawdowns. "The risk perception on Russia is not so good. We had some redemptions," Oztas notes.