Brazil’s leading hedge fund managers including Verde Asset Management, Kapitalo Investimentos, and Ibiuna Investimentos, are growing increasingly pessimistic about local assets, shifting their focus to bets on rising interest rates in the country’s markets, according to a report by Bloomberg.
The trio, who together manage $12bn in assets, have taken on so-called payers — positions that profit from higher interest-rate futures — amid growing concerns over Brazil’s fiscal stability, as highlighted in their recent investor communications.
“Brazil is returning to a familiar scenario where overly expansionist fiscal policies require a tighter monetary response,” São Paulo-based Ibiuna said in a client letter. The firm, led by former central bank directors Rodrigo Azevedo and Mario Toros, added: “We don’t see Brazil well-positioned to benefit from the Fed’s pivot and remain defensive on local assets.”
The country’s budget deficit has ballooned to roughly 10% of GDP, with President Luiz Inacio Lula da Silva’s administration focusing on revenue-raising measures rather than spending cuts to achieve its fiscal targets.
Brazil’s policymakers are expected to raise the benchmark Selic rate by 0.25% next week — coinciding with expectations that the US Federal Reserve will begin easing. While some, including Morgan Stanley strategists, predict the rate differential could strengthen the Brazilian real, several local hedge funds are less optimistic. Verde Asset Management, one of Brazil’s top-performing funds, remains concerned about “worrying fundamentals” and has cut its exposure to local equities to its lowest level since 2016, maintaining a bearish outlook on the real.
Brazilian hedge funds recorded their fourth consecutive month of gains in August. The IHFA Index, which tracks local hedge fund performance, rose by 0.8%, slightly below the CDI benchmark rate’s 0.9% increase. However, the year-to-date performance of 2.5% still lags behind the CDI’s 7.4% rise.
