Bearish Rate Bets Hand Win to Brazil’s Battered Hedge Funds

(Bloomberg) -- Pessimism with domestic assets earned Brazilian hedge funds a rare win in September. 

Some of Brazil’s main hedge funds such as Legacy Capital and Ace Capital posted their best returns of the year last month, boosted by bets on lower yields abroad and higher local rates. Money managers are doubtful the government’s fiscal framework will be enough to stabilize the public debt over the coming years. 

Medium and long-term swap rates in Brazil have advanced at least 40 basis points since last month as fiscal concerns ravaged markets. That helped an index of local hedge funds beat their benchmark for just the third time this year in September.

Funds like Ibiuna Investimentos, which oversees $3.2 billion (18 billion reais), said Brazil is not well positioned to benefit from Federal Reserve’s interest rate cuts or China’s stimulus, given the “potential waves of risk aversion” derived from the country’s fiscal outlook. 

“The weaknesses of local economic policy are becoming increasingly evident,” Legacy said in a monthly note.

An index tracking the performance of Brazilian hedge funds, known as IHFA, climbed 1.1% in September, pushing year-to-date gains to 3.4%. The benchmark CDI rate advanced 0.8% and is now up 8.3% for the year. 

See what the managers said in their monthly notes:

Ace Capital

Fund is positioned for higher short-term inflation breakeven and higher short-term interest rates in local markets. It holds a bullish bet on the real, with the view that the currency will benefit from a higher rate differential.

Adam Capital

Adam holds positions that gain from rising rates in Brazil and is also betting on the devaluation of the real. It holds bullish bets on US equities and wagers on higher US nominal rates.

Bahia Asset Management

Bahia is positioned for a stronger Brazilian real against the Colombian peso, the Chilean peso and the euro.

Genoa Capital

Brazil central bank’s inflation models suggest a total hiking cycle of about 300 basis points. It said it holds positions in the real and in nominal rates, without specifying.

Ibiuna Investimentos

Ibiuna holds positions that gain from higher rates and breakeven inflation in Brazil. It continues to bet on the devaluation of the real and the Mexican peso.

JGP Asset Management

Bets on higher domestic rates and lower yields abroad boosted the fund‘s returns, while a wager on Brazilian real gains weighed negatively. Local market gave little weight to more moderate inflation readings, assessing that they are one-off improvements, given the economy is booming.

Kapitalo Investimentos

Fund cut bullish positions in Brazilian and global equities. Kapitalo boosted bets that gain from a stronger Japanese yen, Turkish lira and Canadian dollar.

Legacy Capital

Fund seeks to keep bets benefiting from higher rates for an extended period in Brazil. It intends to continue to bet on a weaker US dollar against a basket of currencies and on a higher FX volatility, without providing further details.

Verde Asset

Verde scrapped a position that would gain from a stronger US dollar against the real and is betting on higher inflation breakeven rates in Brazil. It holds a wager in higher US real rates and cut a bet in stronger oil prices.

Vinland Capital

Fund added a short position — which gains from the devaluation — in local stocks, and closed a bullish bet in the Chinese stock market.

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