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Brazilian Hedge Funds Are Catching The Eye

Rodrigo Amaral, Madrid , 6 November 2009

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Hedge funds have recovered this year and one country which has seen a vigorous amount of growth is Brazil, as investors are attracted by the continued buoyancy of the economy.

Hedge funds have started to make money again. Brazil has emerged as the new hotspot for global investors. Maybe it is time then to have a look at Brazilian hedge funds?

It might be not a bad idea. After a rocky 2008, when Brazilian hedge funds reported a net outflow of money, the industry is having a more encouraging 2009. The sector as a whole attracted a net 31.5 billion reais ($18 billion) in the first nine months of the year.

It amounts to 43.5 per cent of all the net new money attracted by the Brazilian fund industry in the period, according to data provided by Anbima, the Brazilian association of asset managers and investment bankers. Last year, Brazilian hedge funds posted a net outflow of around 50 billion reais ($28.5 billion).

Investors have been drawn by good performances. According to the Bloomberg Brazilian hedge fund index, in the first three quarters, their performance was three times better than that of global hedge funds, after delivering average returns of 44 per cent before fees.

Brazilian hedge funds ride on the good prospects for Brazil's economy, which is expected to grow by between 4.5 per cent and 5 per cent in 2010, according to forecasts. But insiders also believe some particular characteristics of Brazilian hedge funds have helped by assuring investors that they offer less risk than their peers based in other countries like America.

“The greatest difference of Brazilian hedge funds is that they are much less leveraged than in other countries,” says Luis D'Amato, head of Institutional Relations at Crédit Suisse Hedging-Griffo, in São Paulo.

Brazil has for a long time kept some of the highest interest rates in the world, and is still suffering after sharp reductions in recent years, as the base rate stands at 8.65 per cent. The high cost of money has deterred fund managers from borrowing money to pursue investment strategies. As a result, Brazilian funds struggled less than others when investors took fright and began to redeem their money during the global financial crisis.

Another important lure of Fundos Multimercados, as the local hedge funds are known, is the tight oversight exerted by the Brazilian financial authorities. “Hedge funds are highly regulated here and have to provide a lot of information about their investments,” Mr D'Amato explains.

The rules include the separation of management, administration, custody and audit functions and the granting of powers to the Brazilian securities commission, CVM, to intervene on hedge funds when it is deemed to present a risk to the financial system. Shareholders have considerable power to influence the strategy of the funds and can monitor their performance by following the mandatory publication of daily net asset values by the funds.

The rigid regulatory framework, which is the same that applies to mutual funds, is a result of the long experience of Brazilian authorities of dealing with financial crisis, which were as much a Brazilian product in the 80s and 90s as skilled footballers. The funds are also benefiting from the smaller returns provided by fixed income investments now that interest rates have gone down. Domestic pension funds, in particular, are being compelled to look at more aggressive investment vehicles in order to meet their actuarial goals.

International institutional investors have for some time been aware of the potential of Brazilian hedge funds. Now, companies like Credit Suisse Hedging-Griffo are trying to grasp the attention of private investors too. Mr D'Amato, for instance, says efforts are being made by his firm to contact private banking departments and family offices from other countries that could be interested in investing in its hedge fund products.

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