Brazil Takes Off (Hedge Funds)

Strong performance draws assets back to hedge funds, but how long can it last?

Brazil is flying high again—financial markets
are soaring and the hedge fund industry
is following suit. After big losses in 2008,
Brazilian hedge funds have posted doubledigit
returns on average this year, and assets
are flowing back into the retail-focused
market at a fast clip. Thing is, investors in
Brazil have experienced big swings before.
And six months into this most recent rally,
they’re wondering how long it will last.

In August, assets in Brazil’s hedge funds
jumped by R$8 billion ($4.37 billion), after
leaping R$14.7 billion ($8.03 billion) in
July. Those gains put total hedge fund assets
at R$299.4 billion ($164 billion), 6.4%
higher than 12 months ago, according to
the National Association of Investment
Banks, whose data includes all multimarket
funds, known as multimercados, which often
invest heavily in government debt and
are managed conservatively by the large
commercial banks.

The strong asset flows reflect this year’s
deep cuts in the Central Bank of Brazil’s
Selic interest rate, from 13.75% to 8.75%,
which has rendered yields on fixed-income
instruments less attractive and has led
to a dizzying run-up in Brazil’s financial
markets. The Bovespa Index had gained a
bit more than 50% year-to-date as of September
8, while the currency was up 27%
against the U.S. dollar.

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