Bloomberg — Brazil’s best performing hedge funds are kicking off the new year betting on a bit of everything: 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? Their own country.
Funds have been avoiding large Brazilian bets amid fiscal risks and renewed fears of political instability, which were highlighted this week as rioters who refuse to accept the result of presidential elections won by Luiz Inacio Lula da Silva stormed government buildings in the nation’s capital.
“We’re being conservative on how we deploy risk right now,” said Andre Laport, a former Goldman Sachs Group Inc. partner whose Sao Paulo-based hedge fund Vinland Capital trounced 98% of its 188 peers in 2022. “Our Brazil exposure has been smaller in the light of current asset prices.”
Investors are assessing sticky global inflation and how fast economic activity will react to higher interest rates. The cloudy outlook has led traders to pare bets on risky assets, especially as clear opportunities such as going short US government bonds, which earned funds their biggest gain in six years, fade.
Mar Asset Management’s flagship fund, the third-best performer last year, has been keeping its overall exposure to equities well below historical averages. “It looks like we’ll find little comfort in holding relevant risks in the portfolio in the coming quarters,” it wrote in an investor note.
Here are some of the bets for this year by Brazil managers that topped the ranking compiled by Bloomberg for 2022. The list includes 189 funds that manage at least 500 million reais ($98.1 million) — and excludes those with single shareholders:
Shorting US stocks
The Asa Hedge fund, which beat all 188 Brazil peers last year with a 39% gain, is starting 2023 with a short bet on US equities as its main position, and basically no exposure to local assets.
“The expansion in US equity multiples we saw in the last months of 2022 makes no sense for an economy that will slow down, while there’s no easing cycle in sight,” said Filippe Santa Fe, portfolio manager at Asa Investments.
XP Asset Management is also betting on additional declines in the US stock market even after the S&P 500 Index saw its worst annual drop since 2008, down 19% last year. The risk of a recession in the world’s largest economy should hurt expectations for corporate earnings and weigh on stocks, said Julio Fernandes, who helps manage the XP Macro Plus fund, which topped 97% of peers in 2022.
Brazil Rates
Mar Asset Management is betting the long-end of Brazil’s swap rates curve will rise as President Luiz Inacio Lula da Silva boosts spending, and a rebound in economic activity should lead to renewed pressure over services prices, making it harder for policy makers to cut rates, according to founding partner Bruno Coutinho.
While economists surveyed by the central bank expect Brazil’s gross domestic product to expand by less than 1% this year, Mar is more optimistic, forecasting that higher inflation-adjusted incomes and wages will boost consumption, according to Coutinho. Still, the firm’s Brazilian wager isn’t a large one, he added.
Oil Bulls
Norte Asset Management’s equity-focused hedge fund, which emerged as the big winner from the local election cycle and jumped 28% last year, expects oil prices to rise amid anticipation that the global supply will remain tight.
The 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.
Legacy Capital, whose flagship fund was up 24% last year, is betting on increases in oil prices amid anticipation that China’s economic reopening will boost demand.
“There’s still a mismatch between demand and supply, with limited production capacity at a moment when the Chinese economy is reopening,” Legacy’s founding partner Felipe Guerra said in a call with clients. “We should see a global backdrop of falling stocks and rising oil prices.”
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