Brazilian hedge fund managers have intensified their bearish stance on local assets, particularly in the country’s rates market, as concerns over fiscal policy and rising debt levels deepen. Major players such as Verde Asset Management, Kapitalo Investimentos, and Ibiuna Investimentos, which collectively manage around $12 billion in assets, have recently opened positions that benefit from rising interest-rate futures, according to investor notes reviewed by Bloomberg.
Verde, one of Brazil’s most esteemed hedge funds known for its strong historical returns, and others have taken a defensive approach. They have reduced exposure to local equities, citing “worrying fundamentals,” and shifted focus to strategies that hedge against rising interest rates. This move underscores a growing belief that Brazil’s economic challenges outweigh potential benefits from global monetary easing, particularly in the U.S.
“Brazil is back to a not-so-distant past when overly expansionary fiscal policies required a tighter monetary stance,” Ibiuna, a São Paulo-based firm led by former central bank officials Rodrigo Azevedo and Mario Toros, stated in a letter to clients. The firm expressed skepticism about Brazil’s ability to capitalize on the U.S. Federal Reserve’s expected shift toward easing monetary policy, highlighting fiscal risks as a key obstacle.
Brazil’s budget deficit has ballooned to approximately 10% of its gross domestic product (GDP), a figure that has raised alarms among investors. The administration of President Luiz Inacio Lula da Silva has opted for revenue-generating measures rather than reducing spending to meet its fiscal targets. This approach has heightened concerns about the sustainability of Brazil’s economic policies, leading hedge fund managers to brace for further market volatility.
Monetary policymakers in Brazil are expected to raise the benchmark Selic rate by 25 basis points at their next meeting, aligning with a similar expected move by the U.S. Federal Reserve. While some analysts, including those at Morgan Stanley, argue that the rate differential between Brazil and the U.S. could bolster the Brazilian real, local fund managers remain unconvinced. Verde, for instance, has reduced its exposure to Brazilian stocks to the lowest level since 2016, taking advantage of a recent market rally to sell assets and build additional hedges.
Despite a four-month streak of gains for Brazilian hedge funds, with the IHFA Index rising 0.8% in August, the funds have significantly underperformed the country’s CDI benchmark rate, which saw a 0.9% rise last month and a 7.4% gain year-to-date. This underperformance reflects the cautious stance taken by many local fund managers, who remain wary of Brazil’s fiscal outlook and the potential impact on both local assets and the currency.
The growing disconnect between Brazil’s economic fundamentals and global monetary conditions is likely to continue shaping the strategies of local hedge funds. For many, including Verde, the risks associated with Brazil’s fiscal policies far outweigh the potential upside from favorable external conditions, leading to a sustained preference for defensive positioning in the months ahead.
Bloomberg’s analysis highlights that as Brazil navigates its complex fiscal landscape, investors may see further divergence between global and local market dynamics. The cautious approach by these hedge fund managers signals a broader concern that Brazil’s economic future remains fragile amidst ongoing fiscal and monetary challenges.
