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Hedge funds position for further Russia sanctions

Hedge fund managers are making changes to their funds and preparing for further sanctions against Russia, which they believe could be more severe then what has been enforced to date.

Western sanctions imposed against Russia so far have included travel bans on some of the country's political elite, asset freezes and Visa and MasterCard payment restrictions, with further measures a threat if Russia moves to take more of Ukraine.

(Read more: Russia sanctions: Who's losing out so far)

Russia's President Vladimir Putin and President Barack Obama
Alexei Nikolsky | AFP | Getty Images
Russia's President Vladimir Putin and President Barack Obama

So far, the West is holding fire on more damaging economic sanctions, but President Obama has warned that Russia will face "costs" if it fails to "abide by international norms"

Principal and head of options at III Associates Deep Kumar said he thinks there will be wider sanctions which will have implications for markets.

(Read more: Russia, West 'doomed to agree' on gas issues)

"So far, it's been relatively mild. But I think if there is going to be wider impositions of sanctions, which I think is the program they're speaking of, in the next phase of the sanctions it would be much more severe," Kumar told CNBC at the Investor's Choice Hedge fund Awards on Tuesday, a hedge fund industry event.

"And if that were to be imposed, I think there would be implications for global growth and implications for asset market valuations or stresses, banking stresses to develop. I think all of those could start to come into play and asset markets would get hit in that situation," he added.

Kumar said he was building elements into his fund to both take advantage of and protect against the situation.

"It would be a credit stress type of environment, so we have some positions that take advantage of that," he said, adding that he thinks there will be a general move to dollars and to dollar government-related assets in particular, if further sanctions were put in place.

(Read more: UK hedge funds manage more cash than ever)

The sanctions, imposed against a number of Russian officials as a response to Russia's annexation of Crimea, were drawn up by the U.S. and EU last week.

The U.S. has blacklisted 27 individuals and one bank. The EU has targeted 33 names, some of which overlap with those named by the U.S. Many of the individuals named are said to have close ties with President Vladimir Putin.

Neil Meadows, founder at Laurentia Funds said while his central case is that Russia won't go further into Ukraine, if tensions continue to "ratchet up" there will be a continued reaction in some asset classes.

"Trades I have on at the moment include a long position in the grains in Europe, to benefit from that [Russian sanctions]. I also have position on long palladium, to benefit from supply from Russia. So there will be trading opportunities from further escalation," said Meadows.

(Read more: Russia knows we are serious on sanctions: Dutch PM)

Meadows said he had short positions in fixed income, for normalization of interest rates in both the U.S and Europe, but not in light of political tensions over Ukraine.

Marcus Storr, director and head of hedge funds at institutional fund selector Feri, said the managers he invests with are putting hedge in place in their portfolios in response to the sanctions

"What you see with some managers is that they're overlaying their portfolios with some macro hedges (software which tracks portfolios to ensure a certain level of risk is maintained) just if the situation escalates going beyond what we've seen where the escalation currently is," Storr told CNBC.

"There was a bit of the military effect but if you would see – I don't want to use the word war – but if you would see further escalation then obviously you would see global markets damping down a bit," he added.

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