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. Last Updated: 07/27/2016

Browder Reassures Hermitage Investors

bloombergHermitage manager William Browder
Hermitage, Russia's largest equity fund, with more than $4 billion under management, said it had received redemption requests totaling 3.4 percent of the fund after news that its manager, William Browder, had been expelled from Russia.

In a letter to investors, Browder gave assurances that the Hermitage Fund would fulfill all requests by fund holders to sell their positions. According to the fund's rules, investors may liquidate holdings at the end of each quarter.

"All redemption requests will be met in full as our portfolio is liquid and we have the ability to raise cash quickly if necessary," Browder wrote in the letter, which was dated Sunday.

Reuters, quoting diplomatic sources, reported on March 17 that Browder, a British national, had been refused entry to Russia and deported last November.

Hermitage quickly confirmed the news, surprising investors who had been unaware that Browder -- one of the biggest Russia bulls in the Moscow investment community -- had been barred from the country four months earlier.

No official reason was given for Browder's expulsion at the time, but The Moscow Times has reported that he was barred under a law denying entry to foreigners considered to pose a national security threat.

The Foreign Ministry has declined to comment, while the British government is lobbying to get Browder's visa renewed.

"Regardless of the ultimate amount of redemption notices we receive as a result of this incident, we will not invoke the '5 percent gate' that is mentioned in the Fund's prospectus," Browder said in the letter, which was distributed by e-mail.

The "gate" is a curb on redemptions, which can be used at the fund manager's discretion to prevent mass liquidations from hurting the value of the holdings of the fund's other investors, said one Moscow-based fund manager.

"What he [Browder] is saying is a big sign of confidence," the fund manager said.

Speculation has swirled in the financial community over the possible reasons for Browder's exclusion, with Russian media commentators saying there was unlikely to be a political motive as he is a vocal supporter of President Vladimir Putin's policies.

Bankers and fund managers said Browder's shareholder activism might have set him at odds with corporate interests able to pull the necessary strings to get his visa revoked.

Hermitage has long been a critic of corporate governance at state-controlled gas monopoly Gazprom, in which it is a shareholder.

Hermitage also lost a court case in 2004 against the country's fourth-largest oil firm, Surgutneftegaz, in which it and other funds claimed Surgut had made abusive use of treasury stock to keep control of the company and vote for low dividends.

Browder said diplomatic efforts to restore his visa had been stepped up over the past week.

"Given this heightened activity, we expect to receive further communications from the Russian government in the near future, which should bring more clarity about the resolution of this matter," he wrote.

Browder said the Hermitage Fund had held up well last week, ending down 1 percent on the bid side and 0.7 percent on the offer side. That compared with a fall of 0.5 percent for its benchmark, the CSFB ROS index.

The fund has delivered compound annualized returns of more than 37 percent since Browder set it up with $25 million of startup capital in 1996.

Browder is CEO of Hermitage Capital Management, the investment adviser, while HSBC is the fund's manager.