Ben Aris in Moscow -

Russia's equity markets are amongst the most volatile in the world. Its president is predatory. Its legal system is shoddy and malleable. And its economy is addicted to oil and undeveloped. That's the conventional wisdom. So it must come as a shock to many foreign investors to discover that Russia-dedicated equity funds crowd out all other funds to take the top four slots as the best performing funds in the world over the last decade, according to fund research and rating agency Morningstar.

And this is no one-off either. The best performing fund on the planet over the last 10 years was hedge fund Prosperity Capital Management's flagship Quest Fund, which returned a heart stopping 3,604%. The fund manager's Prosperity Cub Fund and Russian Prosperity Fund also take the number two and three slots, returning 1,828% and 1,604% respectively.

East Capital's Russia Fund returned a stonking 1,564% to make it the world's Fund of the decade best performing onshore regulated fund and fourth on the list of funds of all types. (There is a small controversy over which of East Capital's and Prosperity's funds are the best open-ended fund, as both provide lists giving their fund as the best, citing Morningstar, because there is also a difference between onshore regulated funds and onshore unregulated funds).

Comparing these two kinds of funds is a little like comparing apples and pears, as the Quest Fund is a Caymen Island-registered offshore fund that has a $100,000 minimum investment and must be accessed via a broker, making it largely the stomping ground of professional investors. East Capital's fund has a minimum investment of €20 and is subject to much tighter EU regulations that affect is performance, but consequently it has a higher proportion of small retail investors.

Even so, the differences between the two types of fund haven't prevented Russia funds from dominating the "Best in a decade" records for all funds of any class; in both fund managers' list, Russian funds make up half of the best-performing funds in the world in the last 10 years and take all of the top four slots in the list by a wide margin.

Emerging markets have come of age and are now consistently outperforming

the developed world. Between 2000 and 2010, the western stock markets have almost all lost money for investors, instead of returning the long-term average 8% they are supposed to. The S&P500 was down by just under a quarter between 2000 and 2010, while the UK's main index, the FTSE-100, lost only a little less. The "noughties" have been a disaster for traditional investments.

By contrast, all the emerging markets have made spectacular returns in the last 10 years. The leading MSCI index - that combines all emerging markets into a single index - had returned 102% by New Year's Day this year. The current darling of the investment world, China, did even better with the leading Shanghai Composite index gaining over 191% over the same period.

But even these robust performances pale against Russia's ballistic performance; Russia's leading RTS index returned a whopping 724% over the same period - nearly four times as much as China, which has only two funds in the decade's top-10 returners. "Negative returns in almost all other western stock markets over the last decade challenge the widely-held assumption the 'advanced' countries will keep getting richer," says Liam Halligan, head of strategy at Prosperity, which has $3.1bn under management. "Yet the stand-out success of the 'noughties' has been the Russian stock market. Much maligned, the Russian market is given a wide berth by the vast majority of international investors. Yet it has an annual gain of 23.3% since December 1999 - including last year's dip."

Best and worst of times

So given that this performance makes investing into Russia an extremely obvious strategy, why haven't international investors packed their toothbrushes and high-tailed it to Moscow to get a piece of the action?

Roland Nash, head of research at Renaissance Capital, says that over the last 13 years Russia's stock market has only ever been amongst the top three best performing markets in the world - or the bottom three. It is Russia's bone-shaking volatility that puts many off (as well as its appallingly bad image in the international press). For example, in bne's annual fund ranking released in September last year most funds had minus 50% returns year on year, but plus 50% in the year to date. A gap of a mere four months had turned Russia's equity market on its head. Given most traders have to report quarterly, the volatility can turn the performance of their portfolios into a lottery.

So what's in store for this year? Nash says that investors only need to ask

themselves one key question: "is this going to be one of Russia's good years or a bad one?" While Russian share prices won't repeat 2009's spectacular performance again, the consensus amongst Russia-watchers is the country is clearly in for one of its good years. Most Russia-based investment banks are predicting the RTS index will again be one of the best performing in the world and should rise from about 1400 at the start of this year to 1900-2000 by Christmas.