BIO: Igor Yelnik founded Alphidence Capital Ltd in 2020 and holds the positions of CEO and CIO. Alphidence is a systematic macro hedge fund management firm based in London, UK.
STORY: Igor’s company entered into a forward contract with one of Russia’s biggest banks and sold a very significant amount of the Russian ruble against the US dollar. The company made a considerable profit, but the bank decided not to pay. After a lengthy court battle, the company gave up and counted its losses.
LEARNING: Infrastructure and systematic risks can affect your trade significantly.
“Non-market risks are really paramount in forward currency trades.”
Igor Yelnik
Guest profile
Igor Yelnik founded Alphidence Capital Ltd in 2020 and holds the positions of CEO and CIO. Alphidence is a systematic macro hedge fund management firm based in London. Previously Igor was the CIO for ADG Capital Management from 2013 to 2019. Prior to that, he spent 9 years at IPM Informed Portfolio Management, where he was a Partner and Head of Portfolio Management and Research. Before this, Igor co-founded St. Petersburg Capital, an asset management firm that specialized in the Russian securities market, and later Unibase Invest, a managed futures business based in Tel Aviv.
Worst investment ever
In 1998, Asian prices, oil prices, stock prices, and the Russian ruble were going down. Igor was still working in Russia at that time. The Russian Central Bank established a cap—the currency corridor—they set ranges for the ruble. The exciting part was how much the US dollar could appreciate against the ruble. Everybody understood that the ruble was doomed to depreciate in that macroeconomic environment.
Then the most popular trade of the summer of 1998 happened. This was the currency forward trade. Russian banks believed the Russian Central Bank would support the currency, so they bought the ruble. Then all the foreign banks played against them and sold the ruble.
The ruble was already trading in the Chicago Mercantile Exchange. The foreign price of the ruble on the over-the-counter market in Russia was higher than in Chicago. So in principle, you could sell the ruble in Russia and buy it in Chicago, which was like free money.
Under Russian law, Igor’s company entered into a forward contract with one of Russia’s biggest banks. The company sold a significant amount of the Russian ruble against the US dollar. The trade was entered into in July, and the delivery would be on the 15th of September 1998. The price of the trade was 6.37 rubles for $1.
On the 17th of August, Russia defaulted on its debt denominated in the national currency. At the same time, it stopped supporting the ruble, so it devalued. By the middle of September, the ruble depreciated relative to the US dollar. It went from 6.37 to around 16. So Igor’s company won in that trade. Then on the 14th of September, the morning trading session set the price of the ruble at 8.25. This was still profitable for Igor’s company.
The most interesting thing happened. The Russian bank refused to pay for these contracts, so Igor’s company wasn’t paid for its trade. The company decided to go to court and won. The bank appealed, but Igor won again.
At that time, the Supreme Court decided in a similar case, where another major Russian bank was sued by one of the major French banks because of a non-payment on a similar contract. The Russian Supreme Court decided that the law should not protect a currency-forward transaction because it’s akin to betting. Igor and his company decided enough was enough, so they just dropped the matter that was it. They never received any payment and also lost legal fees.
Lessons learned
- Being right and making money are two very different things.
- Infrastructure risks matter because a winning trade may become a losing one if you have the wrong counterparties and infrastructure.
- If your trade presents a systemic risk, there’s no guarantee you’ll get paid because the government could find non-market ways to deal with you.
Andrew’s takeaways
- Government makes the rules. You may think you’ve made a good bet, but there’s no telling what will happen.
Actionable advice
Think about non-market risks when making forward currency trades. It’s also crucial to understand who you’re in business with. Your business partners have to be honest and dependable.
Igor’s recommendations
Igor recommends three books:
No.1 goal for the next 12 months
Igor’s number one goal for the next 12 months is to perform well as a hedge fund manager.
Parting words
“The last 12 months have been very difficult for many people. I really hope that the next 12 months will be much, much better for all of you.”
Igor Yelnik
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