Top Brazil Investors Shun Local Assets as Recession Threat Looms

Brazil’s largest independent hedge funds have grown wary of local assets after the nation moved to ease its fiscal rules, fueling fears of a sharp increase in interest rates and a potential recession ahead.

A visitor points to an electronic board displaying stock activity at the Brasil Bolsa Balcao (B3) stock exchange in Sao Paulo, Brazil, on Monday, Nov. 8, 2021.
By Vinícius Andrade and Caroline Aragaki
November 12, 2021 | 05:23 PM

Bloomberg — Brazil’s largest independent hedge funds have grown wary of local assets after the nation moved to ease its fiscal rules, fueling fears of a sharp increase in interest rates and a potential recession ahead.

Firms including Itau Unibanco now predict Brazil’s economy will contract next year after policy makers raise the benchmark rate to over 11%, the highest since 2017. That could crimp an economy already struggling in the wake of the global pandemic, which hit Brazil hard. But analysts say it will be needed to keep a lid on inflation as President Jair Bolsonaro pushes to boost public expenditure ahead of elections set for next year.

“It’s a brutal rate increase,” said Andre Jakurski, an industry veteran and founding partner at JGP Asset Management. “That will destroy a lot of growth potential next year,” he said in a recent webcast.

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While Brazilian assets extended their slump last month, funds managed by Ibiuna Investimentos and Legacy Capital maintained their bets on higher oil prices and Kapitalo Investimentos boosted long positions in the commodity. West Texas Intermediate crude oil has surged about 70% this year.

Brazilians continued to yank money out of domestic hedge funds last month. The Ibovespa stock index fell 6.7%, its fourth straight monthly loss. Local government bonds dropped 3.4%, the worst performance in data going back to 2008. Among funds, Adam Capital posted its best performance in over three years, while Verde Asset Management’s attempt to buy the dip in local stocks backfired -- and its flagship posted one of its worst months since its 1997 inception.

“The fund’s positioning has clearly proved fragile given the events that took place in Brazil over the past months,” Verde said in a letter to clients.

Here’s how some of Brazil’s biggest hedge fund managers fared in October:

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Adam Capital

High inflation, lack of clarity over the government’s new social program and Bolsonaro’s threat to interfere in Petrobras’s fuel prices helped drive the weak performance of local stocks last month. Adam’s funds have positions that stand to benefit from the strength of the U.S. economy.

Adam Macro II FIC fund +3.89% in October; benchmark CDI rate +0.48%

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Bahia Asset Management

Brazil’s key rate may reach 14% as policy makers try to re-anchor inflation expectations. The country lost its main pillar of fiscal balance by compromising the spending cap. Hedge funds managed by Bahia continued to cut exposure to Brazilian stocks last month. Scenario demands above-normal caution.

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Bahia AM Marau FIC fund +0.65%

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Ibiuna Investimentos

Repricing of Brazil risk continues and the asset manager stuck to its cautious stance on local assets. Fund is betting the dollar will gain against the real. Fears of a potential populist shift in Brazil’s economic policy have materialized. Ibiuna maintained its long position in oil prices.

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Ibiuna Hedge FIC fund +2.27%

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Kapitalo Investimentos

Brazil’s debt dynamics have worsened as the government eased fiscal rules, with high inflation and heightened fiscal risks making BCB’s task harder. Policy makers will have to lift interest rates far beyond what the market expected, which should weigh on economic activity. Fund scrapped its paying position in local rates and boosted its long position in oil.

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Kapitalo Kappa FIN -0.44%

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Legacy Capital

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The Selic rate will reach 12% in the first quarter of the next year as the central bank tightens monetary policy to fight soaring inflation expectations. Brazil’s outlook has deteriorated “significantly” amid a change in the country’s fiscal rules, and a combination of low investments and high unemployment should lead to a 0.5% contraction in the 2022 GDP. Fund is betting on higher oil prices on anticipation of extended impact of the current energy crisis.

Legacy Capital B FIC FIM +1.12%

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SPX Capital

The political class signaled a potential abandonment of Brazil’s fiscal anchor. Possibility of a breach in the spending cap undermines the stabilization of the nation’s debt-to-GDP ratio going forward.

SPX Nimitz Feeder FIC FIM +1.70%

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Verde Asset Management

Verde’s flagship fund had its fourth-largest monthly drop on record in October, hurt by bets on the local stock market. The asset manager said its view that “a lot of bad news was priced in, and that political actors had reasonable incentives not to breach the spending cap” in Brazil has proved wrong.

Verde FIC FIM -4.39%

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