Investors pulled out of Brazilian hedge funds at an unprecedented rate in 2024, as rising interest rates and turmoil in local markets led to a second consecutive year of underperformance for the struggling sector, according to a report by the Financial Post.
The outflow totalled nearly BRL357bn ($57.3bn), surpassing the combined withdrawals of the previous two years and marking the worst year on record since 2002. This exodus reflects a broader shift back to fixed-income investments, driven by three rate hikes in 2024 and plans for at least two more by March, pushing borrowing costs to 14.25%. Such high rates have made it difficult for hedge funds to outperform simpler investment instruments.
The central bank’s aggressive tightening aims to curb deteriorating inflation expectations amid concerns over Brazil’s growing fiscal deficit. These worries, which intensified in November, drove a sharp rise in swap rates and caused the currency to plunge 21% against the dollar in 2024, the worst performance among emerging markets.
“There was a lot of volatility in currency, rates and equities, making it harder for portfolio managers to generate returns,” Cristiano Cury, a coordinator at capital markets association Anbima, said in an interview. “It’s been hard for them to deliver results, it’s a hard cycle.”
Hedge funds tracked by Anbima’s IHFA index rose just 5.8% in 2024, lagging the 10.9% gain of the CDI overnight rate, a key industry benchmark. This marked the second consecutive year of underperformance. Assets under management dropped to $236.3bn, the lowest since 2021, according to Anbima.
“It was perhaps the second worst half of a year for hedge fund and equity fund industry, or the risk industry as a whole, only losing to the 2008 financial crisis,” Ricardo Eleuterio, a Director at Bradesco Asset Management, one of Brazil’s largest asset managers, said in an event in November, referring to the first semester of 2024. “These are hard times.”
Wrong-way wagers on interest rates, both domestic and global, hurt fund performance. Vinland Capital, for example, lost 6 percentage points from its flagship fund due to global fixed-income positions and another 0.8 percentage point from local rate bets.
Other major players, including Ibiuna Investimentos, Kapitalo Investimentos, and Legacy Capital, also suffered from incorrect rate strategies, as detailed in their investor notes.
Verde Asset Management reported that losses from positions tied to falling local rates earlier in the year were only partially offset by better performance in the latter half of 2024.
Here are key insights from portfolio managers in their December letters:
Ace Capital
– Focused on positions benefiting from higher Brazilian inflation breakeven rates.
– Reduced bets on falling rates in the US and Norway.
– Performance: Ace Capital FIC FIM +1.4% (vs. CDI +0.9%).
Adam Capital
– Predicted further depreciation of the Brazilian real due to domestic and global factors.
– Anticipated fewer rate hikes than market expectations.
– Performance: Adam Macro II FIC +3%.
Bahia Asset Management
– Positioned for higher Brazilian rates and long on the US dollar versus European and Asian currencies.
– Performance: Bahia AM Marau FIC +0.5%.
Genoa Capital
– Expected the Central Bank to adopt a more restrictive stance, with rates reaching 15%-16%.
– Performance: Genoa Capital Radar FIC FIM +1.5%.
Ibiuna Investimentos
– Maintained a defensive stance on Brazilian assets, with positions benefiting from rising rates and inflation breakevens.
– Bet on a stronger US dollar.
– Performance: Ibiuna Hedge STH FIC +2%.
JGP Asset Management
– Gained from Brazilian rate positions and a short on US equities.
– Performance: JGP Strategy FIC +1.5%.
Kapitalo Investimentos
– Closed short positions on the Brazilian real and euro. Reduced exposure to falling rates in Brazil, the UK, Canada, and the US.
– Performance: Kapitalo Kappa FIN -0.5%.
Legacy Capital
– Held long positions in US stocks and the US dollar, citing favourable conditions for the US economy.
– Performance: Legacy Capital FIC -0.1%.
Verde Asset
– Maintained a net short position on Brazilian stocks and reduced global equity exposure.
– Continued betting against the Brazilian real.
– Performance: Verde FIC FIM +2.2%.
Vinland Capital
– Held long positions in the US dollar against the Brazilian real and Japanese yen.
– Performance: Vinland Macro Plus FIC FIM +1.2%.
