Brazil's Top Hedge Funds Are All Avoiding One Thing: Risk

Brazil's Top Hedge Funds Are Starting the New Year with Bets on a Variety of Factors: a Rally in Crude Prices, the Impact of China's Reopening on Global Activity, and Shorting Strategies for Another Slump in US Stocks. The One Thing They Are Avoiding Is Their Own Country.

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Investors have been shying away from big bets on Brazil amid concerns about fiscal risks and renewed political instability. This was highlighted this week as rioters who refused to accept the results of the presidential election, won by Luiz Inacio Lula da Silva, stormed government buildings in the nation's capital.
"We're being very cautious with how we deploy risk at the moment," said Andre Laport, a former Goldman Sachs Group Inc. partner whose Sao Paulo-based hedge fund Vinland Capital outperformed 98% of its 188 peers in 2022. "Our exposure to Brazil has been smaller given current asset prices."

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Investors are assessing global inflation and how economic activity will react to higher interest rates. The uncertain outlook has led traders to reduce bets on risky assets, especially as opportunities to profit from falling prices (such as shorting US government bonds) become less clear.
Mar Asset Management's flagship fund was the third-best performer last year. The fund has been keeping its overall exposure to equities well below historical averages. In an investor note, the fund wrote that it does not expect to find comfort in holding relevant risks in the portfolio in the coming quarters.

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Brazilian managers are betting big on the country's economy in the coming years. According to a ranking compiled by Bloomberg, 189 funds that manage at least 500 million reais (approximately $98.1 million) are betting on Brazil's economy in the next few years. This is a significant increase from previous years, and it shows that managers have faith in the country's ability to rebound from recent challenges. It will be interesting to see how these bets play out in the coming years.
The Asa Hedge fund is starting 2023 with a short bet on US equities as its main position, and basically no exposure to local assets. This is in contrast to its performance last year, when it beat all 188 Brazil peers with a 39% gain.

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"The expansion in US equity multiples we saw in the last months of 2022 is not sustainable for an economy that is slowing down, with no easing cycle in sight," said Filippe Santa Fe, portfolio manager at Asa Investments.

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XP Asset Management is betting on further declines in the US stock market. Julio Fernandes, who helps manage the XP Macro Plus fund, said that the risk of a recession in the US economy should hurt expectations for corporate earnings and weigh on stocks. The fund has outperformed 97% of its peers over the past year.
Mar Asset Management is betting that Brazil's long-term swap rates will rise as President Luiz Inacio Lula da Silva boosts spending. A rebound in economic activity should lead to renewed pressure on service prices, making it harder for policy makers to cut rates, according to founding partner Bruno Coutinho.

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Although economists surveyed by the central bank believe that Brazil's gross domestic product will only grow by less than 1% this year, Mar is more optimistic. He believes that higher inflation-adjusted incomes and wages will lead to increased consumption. However, even though Mar is optimistic about Brazil's future, the firm's investment in the country is not a large one.

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Norte Asset Management's equity-focused hedge fund, which did very well last year after correctly predicting the results of the local election cycle, expects oil prices to rise in the near future. They believe that the global supply of oil will remain tight, leading to higher prices.

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Norte, a Brazilian investment fund, is betting on shares of independent drillers PetroRio SA and 3R Petroleum Oleo e Gas SA, which have been expanding their output, and shorting state-owned oil producer Petroleo Brasileiro SA amid higher political risks, according to Rafael Furlan, a partner at Norte.
Petrobras investors are concerned about a shift in strategy by Brazilian President Luiz Inacio Lula da Silva, who has been pursuing a more populist agenda. Lula has been a strong supporter of Petrobras, but his recent actions have caused some investors to worry about the future of the company.

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Legacy Capital is betting on increases in oil prices amid anticipation that China’s economic reopening will boost demand. The firm's flagship fund was up 24% last year.
"There is still a mismatch between demand and supply, with limited production capacity at a moment when the Chinese economy is reopening," said Felipe Guerra, founding partner of Legacy. "We should see a global backdrop of falling stocks and rising oil prices."