Capitânia Asset & Risk Management, a São Paolo-based hedge fund and advisory firm, has been increasing the proportion of its hedge funds' equity investments. The firm has two hedge funds, HEDGE and TREASURY, which invest in Brazilian equity, foreign exchange, interest rates and commodities via over-the-counter and exchange-traded derivatives.
Arturo Profili, partner, explained Brazil's currency and interest rates have become less volatile in the last 18 months. At the same time, trading equity has become more attractive because of a spate of initial public offerings from local companies in the last year. "This is a trend in Brazil, more and more hedge funds are migrating to arbitrage strategies in equities," he noted. Details of Capitânia's investments could not be determined, but Profili said around 80% of the portfolio of both funds is now invested in equity instruments.
Over-the-counter instruments make up around 5-10% of the portfolios, which Profili believes is in line with most Brazilian hedge funds because they prefer to use the country's established listed derivatives market. Capitânia uses OTC instruments when listed equivalents are not available, for example for exotic options or less common stocks or currencies. The firm looks foremost for credit quality in prospective OTC counterparties, but Profili noted the ability of a bank to structure the instrument well is also important.
