By Maria Ahmed
Brazil’s hedge fund industry is the real force behind the financial sector’s fast-growing sophistication
At $23.7 billion, Brazil’s industry represents only a couple of decimal points of the more than $1 trillion under management in hedge funds worldwide. However, it accounts for the bulk of this type of investment in Latin America.
There are 109 onshore funds in Brazil, and 97 offshore, earning an average annual return of 26.44% and 17.78% respectively, according to data provider Eurekahedge. Offshore funds manage three-quarters of the money, and have experienced the biggest growth, raising more than $8 billion in 2005 alone.
Strategies exploit Brazil’s diversifying capital markets, from going long/short on equities on the fast-growing Bovespa stock exchange, to arbitrage of price differentials on the same security on and offshore, to betting on the continuing depreciation of the dollar against the real.
Started in 1994, Hedging Griffo’s $1.7 billion Verdas Fund is the oldest in Brazil. According to head of investment Luis Stuhlberger, the real competition for hedge funds is the extremely high domestic interest rate, the selic, of 18%. It has made the wealthy families and individuals, who represent around 90% of assets in Brazil’s onshore funds, highly risk averse. “High net worth individuals can go to any bank and invest at government rates, so it’s always our goal to beat that.” Verdas’ returns have beaten the selic for nine of the last 10 years.
However, the industry recently extended the notice required for investors to redeem their funds up from one day, to a 30- to 90-day standard, providing some stability. As interest rates come down, the industry expects Brazil’s state pension funds, with assets of $120 billion, to become major clients.