Latin Finance - March/April 2009 - 24

brazil hedge funds Hedging Looser Policy by Jason Mitchell razil’s hedge fund industry was whacked in 2008 by redemptions and poor performance but could recover this year if interest rates drop, according to experts. Accurate data on the size of Brazil’s hedge fund industry is hard to attain but according to Gávea, a major Brazilian investor, total assets under management (AUM) dropped by 40%-50% in the 12 months to January, to 26 billion reais. Anbid, the investment banking association, says that total AUM of the multimercados industry was $106 billion in December against $116 billion in December 2007. Multimercado is a generic term used in Brazil for funds whose administrators have no clear rules about the instruments in which they can invest, and Gávea says that Anbid’s figures include many high-yield entities that are not true hedge funds, as they do not short, for example. Other data from Hedge Fund Research (HFR) – a Chicago-based industry tracker – show how the whole LatAm hedge fund industry has shrunk during the past year. In the first quarter of 2008 it held $5.26 billion but had lost 32% by the final quarter, when it stood at $3.58 billion. HFR includes local and offshore funds that target LatAm but its numbers are much smaller than Anbid estimates, as it only places funds under the regional category if they allocate more than 50% of the portfolio to LatAm. According to HFR’s Emerging Markets Latin America index, fund performance was negative 28.2% last year, while its Russia/Eastern Europe index nosedived by 57.75% and Asia (ex-Japan) plummeted 33.6%. The LatAm index gained 17.6% in 2007, 15.4% in 2006, 13.7% in 2005, 13.2% in 2004 and 42.0% B After a protracted growth spurt, Brazilian hedge funds were hammered last year by losses and redemptions. They may be poised for rebound as rates tumble. they will invest in low volatility, shortterm funds, as their risk appetite is low,” he adds. Risky Business Brazil’s hedge fund industry has grown remarkably during the past five years and there is a question mark over whether some investors put their money in hedge funds without fully understanding the risk. During the past two years – when Brazil’s financial markets exploded – many small investors wanted to benefit from the boom and invested in hedge funds for the first time. It is this kind of participant who expected performance north of 25% every year – without much risk – that could be put off hedge funds for a long time. It is also possible that mis-selling by under-trained financial advisors took place. And the Bernard Madoff scandal has also caught the headlines. Many wealthy Brazilians invested with him through offshore feeder funds, although it is hard to get precise data on losses, as many local high-net-worth individuals do not want tax authorities to determine what they hold offshore. Industry insiders estimate that total Brazilian exposure to Madoff was in the region of $2 billion. Some Brazilians were introduced to him by Banco Santander – which has agreed to compensate investors as long as they drop any lawsuits – and through Andrés Piedrahita, a socially prominent, Colombian-born banker, son- Brazil on the rise, says Junior in 2003. Industry experts believe Brazilian funds could recover this year and that lower interest rates might trigger new investment. “Copom may be forced to lower interest rates to under 10%,” says Walter Maciel, a managing partner at Quest, a Brazilian hedge fund manager, says: “With lower rates, for example, certificates of deposit become less attractive and investors could start to see the benefits of hedge funds,” he adds. However, Maciel notes that it is hard to predict when Brazilians will return to hedge funds in a big way, since the global economic situation will likely get worse before it gets better. “When people return 24 LATINFINANCE March/April 2009

Latin Finance - March/April 2009

Table of Contents for the Digital Edition of Latin Finance - March/April 2009