Brazil Hedge-Fund Heavyweights Turn Negative on Local Rates

(Bloomberg) -- Brazilian hedge fund managers have doubled down on their pessimism with local assets, and are now targeting wagers in the country’s rates market.

Verde Asset Management, Kapitalo Investimentos and Ibiuna Investimentos, which oversee a combined $12 billion in assets, said they’ve opened so-called payers — positions that gain from higher interest-rate futures — amid lingering fiscal worries, according to recent investor notes.

“Brazil is back to a not-so-distant past when too-expansionist fiscal policies required tighter monetary stance,” Sao Paulo-based Ibiuna wrote in a letter to clients. “We don’t see Brazil well positioned to benefit from the Fed pivot and stick to defensive bets on local assets,” said the fund, which is run by former central bank directors Rodrigo Azevedo and Mario Toros. 

Brazil’s budget deficit has jumped to about 10% of its gross domestic product, and President Luiz Inacio Lula da Silva’s administration has been focusing on ways to boost revenues rather than cost-cutting measures in order to meet fiscal goals. 

Brazilian policymakers are expected lift the benchmark Selic rate by a quarter-percentage point when they meet next week — the same day the Fed is expected to finally begin easing in the US. 

Some strategists, like Morgan Stanley, say the rate differential is set to benefit the Brazilian currency. But for some local fund managers, the Fed boost to risk assets won’t be enough to overcome what Verde called “worrying fundamentals.” The fund, one of the most revered in Brazil for its outsized returns, said it took advantage of last month’s rally to sell stocks and build hedges, and now has the lowest exposure to local equities since 2016. It remains bearish on the real. 

Local hedge funds notched their fourth consecutive gain in August, the longest streak of advances in a year. The IHFA Index, which tracks the performance of a basket of local hedge funds, rose 0.8% last month, slightly below the 0.9% advance for the CDI benchmark rate. Year-to-date, its 2.5% gains by far trail the reference rate’s 7.4% rise. 

Absolute Investimentos

Absolute boosted its position in local equities and is also betting on a stronger US dollar against the Brazilian real. Fund has receivers in US rates.

Ace Capital

Ace raised its exposure to local equities, scooping up shares from electric utilities and banks. It says the Brazilian real may outperform peers, but prefers only tactical trades in the currency for now as volatility may take a toll.

Adam Capital

Fund holds a bearish position in Brazil’s currency and rates, and a bullish bet on local equities amid a strong economy and the government’s moves to shore up domestic demand.

Bahia Asset Management

Bahia holds a relative position that gains from higher Brazil swap rates compared to US rates, and opened a wager that benefits of falling iron ore price.

Genoa Capital

Genoa Capital is forecasting a 150 basis points hiking cycle in Brazil. The central bank communication has been noisy, the fund says.

Ibiuna Investimentos

Ibiuna says it remains short the Brazilian real and Mexican peso. Local benchmark rate seems low for the current economic picture, with GDP over potential, record low unemployment and real depreciation, it says. 

JGP Asset Management

Bets on US steepeners were the main positive for the fund in August. Brazil’s hiking cycle may extend for some time amid an overheated labor market and inflation risks skewed upwards.

Kapitalo Investimentos

Kapitalo has initiated a position against the Brazilian real. It has also raised its exposure to bets that profit from falling rates in the United Kingdom.

Legacy Capital

Legacy estimates a 200 basis points hiking cycle in Brazil and says it remains long equities and betting on falling rates in foreign markets. 

Verde Asset

Verde said it holds a bet in higher breakeven inflation rates in Brazil and is long the US dollar against the Brazilian real. 

Vinland Capital

Vinland holds options that focus on capturing a quarter-percentage point rate hike. It’s betting in a steeper yield curve in the US and falling nominal rates in Mexico, seeing a lower final rate than what’s currently priced in.

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