Brazilian Hedge Funds Thrive Amid Fiscal Turmoil, Posting Strong Gains in November"

Brazilian hedge funds, traditionally positioned to bet against local markets, saw notable gains in November, benefitting from turmoil driven by fiscal concerns, marking their third month of outperformance in 2024, according to a report by BNN Bloomberg. The funds profited as economic instability and government policy missteps affected the Brazilian market.

The administration of President Luiz Inácio Lula da Silva presented a fiscal adjustment plan that failed to meet traders' expectations, with concerns that it would not sufficiently stabilize Brazil's public finances. This disappointment led to a sharp depreciation of the Brazilian real, which hit an all-time low. Additionally, medium-term interest rate futures surged by 150 basis points, indicating expectations of further tightening and a possible increase in the Selic benchmark rate above 15%.

Hedge funds like Ibiuna Investimentos, Truxt Investimentos, and Verde Asset Management were among those who capitalized on the market’s downturn, posting returns of over 3% in November by shorting Brazilian assets. The Central Bank of Brazil responded aggressively to the rising inflationary pressures and economic instability, raising the benchmark interest rate by one percentage point and signalling more hikes ahead to curb inflation and stabilize the economy.

In response to the fiscal and monetary developments, policymakers acknowledged the significant impact that the government's recent fiscal policies had on local markets. The IHFA hedge fund index climbed by 1.4% in November, lifting its year-to-date gains to 5.5%. Meanwhile, the CDI benchmark rate rose by 0.8% during the month, with an annual increase of 10.3% for 2024.

Fund-Specific Highlights

• Ace Capital FIC FIM: +2.3% (vs. CDI +0.8% in November) Adam Capital maintained bullish positions in US equities and the dollar while placing bearish bets on Europe and Asia. They viewed Brazil's fiscal policies as pushing up the country's neutral interest rate.

• Adam Macro II FIC: +3.9% Bahia Asset Management held positions anticipating higher Brazilian rates and reduced long exposure to the real, while also betting on a stronger US dollar against European and Asian currencies.

• Bahia AM Marau FIC: +0.6% Genoa Capital expected monetary tightening to exceed 400 basis points, focusing on positions in Brazilian rates and inflation-linked instruments.

• Genoa Capital Radar FIC FIM: +1.8% Ibiuna Investimentos criticized Finance Minister Fernando Haddad’s fiscal credibility, citing political interference. The firm maintained positions that would benefit from rising nominal rates and implicit inflation.

• Ibiuna Hedge STH FIC: +3% JGP Asset Management profited from bets on rising rates in Brazil and short positions in the real against the dollar.

• JGP Strategy FIC: +1.8% Kapitalo Investimentos increased positions favouring falling interest rates in the UK, Canada, and the US while betting on a weaker Brazilian real.

• Kapitalo Kappa FIN: +1% Legacy Capital trimmed long positions in the US dollar but remained bullish on US equities, citing favourable economic conditions in the country.

• Legacy Capital FIC: +1.4% Truxt Investimentos saw its highest return since inception in 2017, benefitting from European rate receiver positions and bearish domestic trades, achieving a monthly return of +3.3%.

• Truxt I Macro FIC FIM: +3.3% Verde Asset Management held bearish positions in Brazilian equities while keeping bullish exposure to global stocks and breakeven inflation rates.

• Verde FIC FIM: +3.3% Vinland Capital focused on relative positions in Brazil’s banking sector and exited global equity bets, with the Vinland Macro Plus FIC FIM posting a return of +1.4%.

  
  

The results for November underscore a broader trend of hedge funds in Brazil capitalising on market volatility caused by the country’s fiscal challenges. These hedge funds, armed with strategic positions in Brazilian assets and global markets, have been able to generate impressive returns while maintaining flexibility to adapt to the shifting economic landscape. The policy-driven volatility is expected to continue offering opportunities for these funds, making Brazil a key area of focus for hedge fund managers in the months ahead.