Brazil’s hedge fund industry is undergoing a sharp reversal, with prominent managers closing or restructuring independent firms and major banks increasingly stepping in to absorb investment teams and strategies, according to a report by Bloomberg.
The shift has been highlighted by Arminio Fraga, one of Brazil’s best-known hedge fund investors, who recently transferred his funds to the asset-management arm of Banco Bradesco.
Fraga, a former Brazilian central bank governor and one-time associate of George Soros, founded Gavea Investimentos two decades ago. He said the combination of Brazil’s high interest rates, weak recent hedge fund performance and competition from tax-advantaged investment products had made the independent fund model increasingly difficult.
Brazil’s benchmark interest rate has remained above 10% for a fourth consecutive year, making government and other fixed-income investments particularly attractive to investors who might otherwise allocate to higher-risk hedge fund strategies.
The result has been a significant contraction among independent macro managers. Assets across seven of Brazil’s largest independent hedge funds’ domestic macro strategies have fallen by almost half since 2022 to about BRL89bn ($17bn), according to data from Anbima.
The number of macro funds has also declined by around 20% from its 2021 peak, standing at 743 in July.
More broadly, Brazil’s hedge fund sector is heading towards a fifth consecutive year of net outflows, with investors withdrawing approximately BRL672bn since 2022.
Banks, however, are moving in the opposite direction.
The combined assets managed by macro funds housed within the country’s six largest financial institutions have nearly doubled since 2019, reaching BRL542bn by June, according to Bloomberg data.
The trend represents a reversal of the wave of departures from Brazilian banks that occurred roughly a decade ago. At the time, falling interest rates forced investors to look beyond government bonds for returns, helping fuel the creation of a new generation of independent hedge funds and equity managers.
That environment changed dramatically when the central bank began raising rates in 2022 to combat inflation. As yields on relatively low-risk fixed-income investments rose, investors became less willing to tolerate the volatility and fees associated with hedge funds.
The industry’s problems have also been compounded by competition from exchange-traded funds and tax-exempt corporate bonds, which have attracted both institutional and retail capital.
Major banks are increasingly able to use their scale to attract experienced managers who may struggle to build standalone businesses. Investment teams can retain responsibility for their strategies while benefiting from established distribution networks and avoiding many of the compliance, technology and back-office costs associated with running an independent asset manager.
That model has already attracted several prominent hedge fund executives. Itau Asset Management recently hired Luiz Eduardo Portella, co-founder of Novus Capital, to establish a hedge fund investment pod. The bank has also incorporated equity manager Solana Capital and appointed Eduardo Zilberman, formerly of SPX Capital, to lead economic research.
The deterioration in the macro environment has further complicated the outlook. Expectations earlier this year that falling rates and strong international demand for Brazilian equities could revive the hedge fund sector were disrupted by the oil shock linked to the war in Iran.
March became the worst month for Brazilian hedge funds since 2020, according to Anbima, after the global rates sell-off undermined positions built around expectations of monetary easing.
Markets now expect Brazil’s central bank to keep its benchmark rate above 13% through at least the end of 2027.
