Updated July 21, 2008

   Managing companies will soon get an opportunity to earn at falling market. This becomes possible due to wide use of futures contracts. As it became known, Federal Financial Markets Service (FFMS) has elaborated core provisions of the document that regulates risks of managers in terms of such contracts use.

   FFMS prepared "Provision for reduction (limitation) of risks related to assets’ trust management". The document sets requirements to assets management of mutual funds and pension reserves of National Pension Fund (NPF) with futures contracts’ use. "Provision was elaborated under the act enabling such deals signing only in terms of risks limitation from regulator part", explained head of FFMS department for regulation and control over pooled investments Alexander Bezkrovniy. He was also quoted as saying that now the Service works on document preparation to register it in the Ministry of Justice.

   Provision about risks becomes the last key document crucial for normal functioning of the Russian pooled investments’ market after amendments accepted at 2007-end to such acts as "About investment funds" and "About securities market" have come into force. Earlier other two key documents have been accepted: provision determining criteria for qualified investors, and provision about mix and structure of investment funds’ assets. After amendments to legislation come into force, four new categories of funds – credit, rental, hedge funds and commodity market funds – appear at the Russian market.

   Primary task of futures contracts for managers is risks reduction of portfolio price change. Moreover, one can maintain its high profitability due to futures contracts. Current legal limitations prevent managers from futures contracts signing priced at more than 10% from net assets costs of fund. "It is rather small value, therefore it has been hard to use tools of derivatives market", says Troika Dialog portfolio manager Vladimir Potapov. New provision removes this limitation.

   Thus, FFMS is going to limit maximum margin between costs of underlying asset and futures contract to it. Futures could be concluded only in case correlation of its price and cost of underlying asset totals no less than 60%. "If one security hedges another, their prices should move in one direction. The higher correlation, the lesser securities number can be used for hedging", explains director of MICEX department for stock exchange Mikhail Temnichenko.

   Alfa Capital Company head Andrey Kilin marks that absence of provision about hedging that would fix correlation coefficient has actually permitted managers "to do whatever they what". For instance, managers could sign futures contracts at any price and to underlying asset, and that increased risks for investors, as says Mr. Kilin. "Current limitations have been not always able to protect investors from risks", consents Metropol Company top portfolio manager Arseniy Yegiazarov. "Usually, correlation of the Russian equity market is around 80%, therefore a criterion set by FFMS is very liberal", considers Troika Dialog portfolio manager Vladimir Potapov.

   Managers of hedge funds foremost that before long appear at the Russian market will be interested in regulations elaborated by FFMS. Such funds managers will be eligible to sign futures contracts at 100% of their assets. This will provide high protection level from market drop. So, according to HSBC data, Kazimir Russia Grouth is the best hedge fund by profitability (48,8%) that invested in the Russian assets in 2007. Thus, the overwhelming majority of share mutual funds have demonstrated less than 30% profitability. An opportunity to earn at the falling market attracts great number of investors, as experts forecast. "For our market hedge funds should become the core tool of facilities investing", sums up Mr. Yegiazarov.