(Bloomberg) — Investors yanked money out Brazilian hedge funds at a record pace in 2024 as rising interest rates and a crumbling of local markets fueled a second year of underperformance for the struggling industry.
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The stampede — almost 357 billion reais ($57.3 billion,) more than the past two years combined and the worst-ever in data going back to 2002 — comes as investors flock back to fixed income. Policymakers delivered three rate hikes in 2024 and pledged at least two more increases by March, which will take borrowing costs to 14.25%. That’s made it harder for hedge funds to beat returns of plain-vanilla instruments.
The central bank is tightening to try to contain a deterioration in inflation expectations as traders grow worried about Brazil’s swelling budget deficit. The concerns, which kicked into high gear in November, fueled a surge in swap rates in 2024 and sent the currency tumbling 21% against the dollar, the worst showing in emerging markets.
“There was a lot of volatility in currency, rates and equities, making it harder for portfolio managers to generate returns,” Cristiano Cury, a coordinator at capital markets association Anbima, said in an interview. “It’s been hard for them to deliver results, it’s a hard cycle.”
A basket of hedge funds tracked by Anbima’s IHFA index rose 5.8% last year, compared with a 10.9% gain for the CDI overnight rate, which serves as a reference for the industry. It was the second straight year hedge funds lagged the benchmark. Assets under management plunged to $236.3 billion, the lowest since 2021, according to Anbima.
“It was perhaps the second worst half of a year for hedge fund and equity fund industry, or the risk industry as a whole, only losing to the 2008 financial crisis,” Ricardo Eleuterio, a director at Bradesco Asset Management, one of Brazil’s largest asset managers, said in an event in November, referring to the first semester of 2024. “These are hard times.”
Wrong-way wagers on rates — both at home and abroad — weighed on performance. Vinland Capital’s bets in global fixed-income assets shaved 6 percentage points from the flagship fund’s results for the year, and positions in Brazilian rates brought numbers down by another 0.8 percentage point.
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Ibiuna Investimentos, another local powerhouse, Kapitalo Investimentos and Legacy Capital also were affected by wrong bets in rates, according to monthly notes to investors.
Losses in positions that gained from lower local rates in the first half of the year “played an important role” in the returns of Verde Asset Management’s flagship fund, it said in a note to clients. A significant part of that retreat was offset in the second half, the fund said.
Here it’s what portfolio managers had to say in their December monthly notes:
Ace Capital
Ace holds positions that gain from higher Brazil’s inflation breakeven rates. Fund cut bets that benefit from falling rates in the US and Norway.
Adam Capital
Fund says that the Brazilian real should continue to fall, due to both external and local factors. The central bank won’t deliver all rate hikes priced in by traders.
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Adam Macro II FIC +3%
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Link to letter
Bahia Asset Management
Fund is positioned for higher rates in Brazil. It holds a long position in US dollar against a basket of European and Asian currencies.
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Bahia AM Marau FIC +0.5%
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Link to letter
Genoa Capital
Genoa sees the Central Bank adopting an even more restrictive stance, taking interest rates to between 15% and 16%.
Ibiuna Investimentos
Fund remains defensive toward Brazilian assets, holding positions that profit from rising rates and inflation breakeavens. It also holds a bet on a stronger US dollar.
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Ibiuna Hedge STH FIC +2%
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Link to letter
JGP Asset Management
Fund gained in December with positions on rates in Brazil and a short in the US equities.
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JGP Strategy FIC +1.5%
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Link to letter
Kapitalo Investimentos
Fund closed short positions in the Brazilian real and the euro. It also cut positions that benefit from falling rates in Brazil, UK, Canada and the US, and reduced long positions in Brazilian stocks.
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Kapitalo Kappa FIN -0.5%
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Link to letter
Legacy Capital
Fund holds long positions in US stocks and the US dollar, given the relatively favorable outlook for the world’s largest economy.
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Legacy Capital FIC -0.1%
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Link to letter
Verde Asset
Fund remained net short on Brazilian stocks and reduced exposure to global equities. It is betting against the Brazilian real.
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Verde FIC FIM +2.2%
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Link to letter
Vinland Capital
Fund has long positions in US dollar against the Brazilian real and the Japanese yen.
–With assistance from Giovanna Serafim.
(Updates 8th paragraph with information on other Brazil hedge funds hit by positions in rates.)
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