Latin Finance - April 2008 - 60

hedge fund survey Building a Long-Term Relationship by Staff Reporters razilian hedge funds may be roiled by global turmoil, but they are quickly accumulating cash and increasingly looking to overseas markets. Recent regulatory changes permit domestic Brazilian funds to invest internationally, and they require aid from international banks to do that. “Brazilians will need some help in developing this market,” says Eduardo Penido Monteiro, partner at Opportunity, a hedge fund based in Rio and Sao Paulo with 16 billion reais under management. “The number of investors that will want to trade offshore is going to be a lot bigger,” he adds. Opportunity has some $600 million in offshore-based equities funds. “Brazilians will need a hand in understanding how foreign markets work – legislation and tax issues especially. Brokers will get a lot of points for being a source of information on these issues,” says Monteiro. With this in mind, LatinFinance recently surveyed 21 Brazilian hedge funds to assess their strategy and service providers. The sample group included six funds with less than $50 million under management, five with up to $150 million, four with $150$300 million, two with $300 million to $1 billion, and one running more than a $1 billion equivalent. The average target annualized return was 17.2% and the average actual annualized return 23.8%. Asset allocation of the group was 85% domestic, 9% other LatAm countries, 3% US and 3% Asia. Some 57% had exposure to depository receipts, 90% to local equity, while 43% were in sovereign bonds and 24% in corporate fixed income. Just over half said they had foreign exchange exposure, 14% to structured assets, 62% derivatives and 33% were in cash while 10% had private equity investment. Around 95% of the Brazilian hedge funds we surveyed said they had maintained the same investment strategy for the past 12 months. The same number B Brazil’s expanding hedge fund community looks to foreign banks to develop an offshore business. Global players have the advantage as service providers. Hedge Fund Survey Locals and foreign shops battle for business BrokerDealer/ Prime Broker Credit Suisse UBS Deutsche Bank Agora Codepe Hedging-Griffo Banif Primus Concordia Goldman Sachs Itaú Bradesco Bank of New York Mellon Butterfield Fund Services Source: LatinFinance Custody/ Clearing Excellent Good Neutral expects to retain the exact same investment strategy for the next 12 months. This implies 24% will be macro investors, 24% multi-strategy, 19% aggressive growth, 10% fund of funds, 10% income, 19% market neutral – arbitrage, 19% market timing, 19% special situations and 5% event driven. Most of the cash invested by our sample group comes from Brazil (52%), with 31% from Europe, 10% US, 4% other LatAm and 3% Asia. Around 51% comes from high net worth individuals, 30% institutional investors, 8% banks, 5% family offices, 4% proprietary traders and 2% retail/low to middle income clients Service providers are all over the map, with Goldman Sachs, Morgan Stanley, UBS, Deutsche Bank, Credit Suisse, Bank of New Fund York Mellon among the names Admin/ mentioned. Praise is similarly Back dispersed (see chart). Office “We use a group of brokers, all of whom in general are good at all of the products,” says Monteiro. “They are houses that have a presence around the world, which is important.” “Since Brazilian managers don’t use much leverage when trading, they tend not to use prime brokerage services,” he adds. The fee structure is based on lending and leverage so it would not make sense for nonleveraged investing. “We differentiate between two types of brokers – the kind that provides research and other value added market information and the kind that can provide the best possible price,” says Wagner Murgel, co-founder and portfolio manager at NEO Investimentos, a hedge fund with 1.2 billion reais under management. “Quality of service and good execution are non-negotiable.” Murgel declines to name specific brokers, but says the widely recognized top research shops are among the ones he uses. “The decision can never be made purely on price because the cost of sacrificing a relationship and loyalty may be much bigger in the long run,” says Murgel. “We think it’s important to establish a long term relationship with a broker and do business in a way that’s efficient for both sides.”LF 60 LATINFINANCE April 2008

Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008