INSTITUTIONAL INVESTOR: Brazil’s Hedge Funds Crank Up the Risk Dial

as rates in Brazil plunge, the country’s hedge fund managers are buying riskier assets. But are investors ready?

Brazilian hedge fund managers historically haven’t had to work that hard to earn good returns. They have used the country’s sky-high interest rates as the basis of their investment strategy, often effortlessly outperforming equity markets as rates were in the double digits. But since August of last year, with rates having been slashed to single digits, investors are starting to question this strategy. They are demanding that hedge fund managers invest in riskier assets — from corporate bonds to equities — to bolster returns. This change has the potential to transform the hedge fund industry in Brazil — that is, if inflation, a constant worry in the country, does not force a retreat from the lower-rate policy.

The vast majority of Brazilian hedge funds, holding over 95 percent of these riskier assets, are multimercado funds — the name for any fund that can invest in more than one asset class. They have traditionally followed a fairly simple formula for success, dubbed the “Brazil kit”: They invest the majority of their assets in domestic fixed-income securities, then throw in a dash of currencies, overseas bonds and domestic equities for good measure. It is a low-volatility strategy, but also a lucrative one because interest rates have been so high. But with the Brazilian Central Bank slashing rates, the easy money days may be over. Overnight rates in Brazil are now 8 percent, compared with 12.5 percent in 2011. While that drives up the price of managers’ existing bonds, it also means that new bond purchases will now offer lower yields.

This is the start of an article that looks at the development of Brazilian multimercado (hedge) funds. To see the full article, please go to Institutional Investor's website ( 

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I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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