Investors cleaning up in Russia

Bill Browder is perhaps the best example of the potential dangers of activist investing.

The Moscow office of his has been bugged, his staff intimidated, he has been sued for defamation and, finally, the largest foreign investor in the Russian stock market was barred from the country 16 months ago as a threat to "the security of the state".

Browder, 43, does not look like a danger to any country's security. On the contrary, he comes from a standard-issue middle-aged investment banker mould, balding with a dark suit and spectacles, fitting his history as a former proprietary trader at Salomon Brothers.

But taking on Russia's super-rich oligarchs over the past 11 years has left him with enemies powerful enough to secure his ejection from the country. This has done nothing to damp his enthusiasm for investing in what may be some of the world's worst-run companies.

After returns of 38.6 per cent from Hermitage's involvement in Russia last year, he is extending his aggressive activism outside the country for the first time with a $625 million fund raised last month. "There's still enough in Russia to keep me busy," he says. "But there are opportunities elsewhere as well."

Focus

Browder's move breaks a lifetime of focusing on Russia. His grandmother was Russian and his grandfather, Earl, was general secretary of the Communist party in the US. He moved from picking deep-value stocks to activism out of desperation. One big investment, oil holding company Sidanco, tried to issue convertible bonds to controlling shareholders at a 96 per cent discount, which would have left Hermitage almost $100 million out of pocket.

His legal and regulatory attempts to block the move failed, but after he persuaded the international press to report the situation, Browder concluded that in Russia the public outcry created by the media was the best way to put pressure on management.

He won that case, and went on to take on Gaz-prom, Sberbank, and UES among others. In the chaotic markets that followed the downfall of Communism, the courts and regulators had little power.

Following the devaluation of the rouble in 1998, executives found they had no hope of securing western investment, removing the only remaining incentive to behave.

"We tried the courts and regulators, but had limited luck. We only had the press. We took positions, intensively researched those companies and disclosed all the questionable activities," Browder says. This approach has delivered phenomenal returns to Hermitage investors, turning $100 invested when he set the fund up with the late Edmond Safra in 1996 into $2,497 by the end of March this year, against $1,592 for the CSFB ROS Russia index.

In the process it has made Browder himself incredibly rich. He pocketed $160 million last year, according to estimates from Alpha Magazine.

It has also helped transform corporate governance at many of Russia's biggest companies.

A study by Alexander Dyck, an associate professor at the University of Toronto's Rotman School of Management, went even further.

He identified a "Hermitage effect", where the presence of the fund as an investor increased the chance of stopping corporate abuse from 29 to 70 per cent - while quadrupling coverage in international newspapers.

Dyck says Hermitage is also an almost-perfect test case proving that shareholder activism generates value, as Russia at the start of the decade had none of the alternative protections that complicate studies in the US and Europe.