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. Last Updated: 07/27/2016

Fund Offers Expats Shot at Securities

Foreigners interested in exploring the uncharted waters of Russian securities may soon have a ship to carry them, and the ticket to ride sells for something less than the tens of thousands of dollars currently demanded by Moscow's brokerage community.


Donald Knapp, 27, a former oil and gas auditor and consultant with Arthur Andersen, is currently raising capital to begin operations of his Red Horizon Partners Ltd.


Unlike most brokerage houses, which commonly require stakes of $100,000 or more and target institutional investors, Knapp's fund requires a minimum subscription of $5,000, with additional investments in $5,000 increments.


"Potentially there's some good investment funds in the expatriate market," said Knapp. "They definitely have some excess funds to invest. Also, expatriates are already here taking the risk -- drinking the water and breathing the air. They might as well make some more money out of it."


The fund, which would peak at $5 million, is an offshore company registered in the Bahamas, and as such is available to foreigners, Knapp said. So far, Americans and Britons have shown the most interest.


Investments to date total about $440,000, and Knapp has until July 15 to raise the $1 million minimum, after which investments will be committed for 30 months. Exit strategies range from selling shares back to the fund to merging with a larger fund, depending on the market's liquidity and demand at the time.


Reporting will consist of quarterly reports, with auditing by Coopers & Lybrand.


Knapp said he sensed a niche in the market after he left Arthur Anderson in November to pursue personal investment in equities and voucher-privatization auctions.


Some of his former colleagues asked if they could piggy-back on some of his investments.


"I was going to Tatarstan, where they still had voucher auctions, and I said if I could get a good deal on the shares I'd do some buying for them," he said. "I told them on a Tuesday, and on Wednesday they had $10,000 ready for me. But the deal didn't look very good."


Brokers said Knapp has a niche, and noted previous funds of up to $200,000, through which mutual friends have pooled their money to invest. But one pointed out that Knapp's fund is very small in relation to the problems and bureaucracy of trading in Russia." To be perfectly honest, it's almost a hassle to manage $5 million. It's just not worth it," said the analyst, who wished not to be identified.


He added that the low funds may explain why Knapp is charging an annual management fee of 5 percent, deemed high by the one analyst but average for the size of the fund by other brokers. Knapp also earns a 15 percent commission on quarterly profits of more than 10 percent.


"I think it's a great idea," said Danielle Downing, director of sales and research for Alliance-Menatep. "I think there's definitely a niche. There's a lot of interest from expats and small investors to put money into the market, and this is a good solution."


That sentiment was echoed by Terry Olin, an equities trader with C.A.&Co., which has its own retail investment branch with a minimum subscription of $10,000.


"He's probably going to get a bit more sophisticated investor than buys individual stocks in the states, and he'll be dealing with somewhat less-sophisticated investors than we deal with, so I think there's a niche," said Olin.


C.A.&Co. offers stock purchases in individual companies -- a much more technical and risky form of investment than a fund, which offers wider diversification for less money invested.


While brokers may admit Knapp has a niche, he still must overcome the inexperience factor. But with the help of a board of directors that includes Jim Tilley, former Moscow head of Conoco Petroleum International, Knapp said he thinks he can make a go of it with the current fund and perhaps with others.


"I really want to get this fund up and running. Then we'll have a track record," he said.


"To be here and go through everything with being in Russia and not take advantage of [the market], that's what I don't want to be thinking about years from now."