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Hedge funds buy war insurance on Russia-Ukraine conflict

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Investment firms have sharply increased the protection they buy against macroeconomic shocks, so called "tail risk" hedging for a potential armed conflict in Eastern Europe.

"There's been an uptick in hedging activity—we've definitely seen funds add to tail hedges in case the conflict escalates," said Jon Kinderlerer, who analyzes Credit Suisse's hedge fund client portfolios as head of risk and portfolio advisory for the bank's prime brokerage division.

In February, the percentage of funds that purchased "deep downside" protection—a financial bet that would gain if there is a significant drop in global stocks—hit a two-year low of less than 13 percent. That spiked to more than 17 percent as of Monday, according to Credit Suisse data.

That level is still below the peak of the European crisis in the summer of 2012 and the financial drama in Cyprus in early 2013.

Hedge fund clients of Credit Suisse had less than 0.5 percent of their portfolios exposed to Russia and Ukraine as of Monday. And hedge funds have lowered that already small exposure in recent weeks, according to Credit Suisse.

(Read more: Can Russia take my Pepsi? Consumer brands at risk)

The real risk is from the likely global economic ripples in the event of more serious Russian military moves in Ukraine.

"Ukraine is a nonissue for hedge funds, but if conflict breaks out, the region becomes a wider risk for them. There would likely be a flight to quality out of emerging market stocks. Treasurys and gold would also rally," Kinderlerer said.

Charlemagne Capital, a $2.7 billion asset manager that focuses on emerging markets, especially in Russia and Eastern Europe, recently told clients its exposure to Ukraine was minimal, but there was still cause for concern.

"We are continuing to monitor this situation closely," Charlemagne wrote to clients. The firm noted that stocks in its Russian and Eastern European portfolio "have almost no exposure to Ukraine."

The one exception, Russian telecommunications group Mobile TeleSystems, has less than 10 percent of its sales in Ukraine. But the firm is switching the holding into another stock, according to the client note.

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Brave new frontier: Investing in Ukraine

While hedge funds are largely unaffected so far, at least one private equity firm sees the turmoil as an investment opportunity.

"There are so many areas where Ukraine could do extremely well but they need financial support to get some macroeconomic situations in order. After that, investments in Ukraine are still very promising," Michael Bleyzer, president of $1 billion Eastern European specialist SigmaBleyzer, told CNBC on Friday.

"I'm optimistic, even after 20 years of a fairly tough investment environment in Ukraine. We've done pretty well. Certainly the opportunity is much greater," Bleyzer added.

He said agriculture was the most important opportunity in the country, along with smaller plays in cable, pharmaceutical, chocolate and software companies.

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.