Traders Quit Banks to Earn $4.8 Million Hedge Fund Salaries in Brazil 

(Bloomberg) -- As hedge funds around the world shrink because of low returns and high fees, one country is bucking the trend: Brazil, where traders are quitting their bank jobs in droves to try their luck at potential multimillion-dollar payoffs.

“New asset-management firms are raising money and posting fast profits, so they have a lot to spend on traders’ compensation,” Leon Goldberg, a partner at XP Inc., Brazil’s biggest brokerage, said in an interview. “Many of them are taking talent away from competitors.”

Senior executives in Brazil are abandoning long careers at major banks including JPMorgan Chase & Co., Credit Suisse Group AG and Itau Unibanco Holding SA to create their own hedge funds and equity funds, lured by the chance for more independence and fatter paychecks. Several firms are poaching each other’s ranks as the fight for talent intensifies.

A top hedge fund trader can earn more than 25 million reais ($4.8 million) a year in Brazil, with a handful of the biggest asset-management stars hauling in as much as 100 million reais in total compensation, according to people familiar with industry pay levels. Bank executives running an asset-management unit or proprietary-trading desk rarely make more than 15 million reais, the people said, asking not to be identified discussing private compensation policies.

Hedge funds have other advantages, too.

“When you’re a partner at your hedge fund, you don’t have a compensation cap as you do in a bank,” said Ricardo Amatto, a partner at executive search firm Heidrick & Struggles in Brazil. “Also, almost all banks defer bonuses and other payments linked to performance for three to four years, while in a hedge fund you get all your money at once.”

There’s more. Partners at a hedge fund firm receive most of their compensation through dividends, Amatto said, and those payments are tax-free in Brazil. At a bank, compensation is taxed at 27.5%.

“So you can see why so many senior people left banks to become fund entrepreneurs,” Amatto said.

Among the major departures: Sylvio Castro, Credit Suisse’s former chief investment officer for the private-banking unit in Brazil, who left to create his own hedge fund. The chief executive officer at Itau’s asset-management unit departed this year to launch a new firm, after his predecessor did the same about a year before. Jorge Oliveira, a former JPMorgan executive, joined a hedge fund founded by JPMorgan veteran Giovani Silva -- replacing an executive who left to create his own company.

Read about the latest hedge fund firm taking off in Brazil

Brazil’s $1.1 trillion local asset-management industry is the biggest in Latin America, and it’s historically been controlled by big banks that invested customers’ funds mostly in plain-vanilla products. That was good enough when returns hovered around 14% four years ago. Now that the nation’s benchmark rate has tumbled to just 2%, below inflation, investors are more than willing to pay as much as 2.5% a year in management fees, plus 20% in performance fees, to try for higher returns at a hedge fund.

“Low interest rates are fueling growth dreams for asset managers,” said Patrick O’Grady, chief executive officer at Vitreo, an investment firm and broker-dealer with 7 billion reais under management.

That’s held true even through the pandemic, as the central bank kept liquidity flowing by injecting more than 1.1 trillion reais into the financial system. Hedge funds posted record inflows of 88.8 billion reais this year through October in Brazil, after raising 77.3 billion reais last year, according to Anbima, the nation’s capital-markets association.

“There are still about 7 trillion reais invested in fixed-income products in Brazil, with negative real returns, so the migration to riskier assets such as stocks should continue,” said Sara Delfim, who helped found Dahlia Capital in 2018 after nine years at Bank of America Corp. “The outlook for the local fund industry remains positive.”

It’s a stark contrast to what’s happening globally. Worldwide, hedge funds this year posted almost $55 billion in outflows through October, after losing $102 billion in 2019, according to data compiled by eVestment. Investors have dumped them in favor of cheaper, passive products after years of suffering through returns that trailed benchmark indexes.

In Brazil, firms such as Genoa Capital Gestora de Recursos are reaping the rewards. Launched in June, the firm’s hedge fund amassed almost 7 billion reais for its flagship investment vehicle within two months of its inception, and is now closed for new investments. Founded by Andre Raduan, Mariano Steinert and Emerson Codogno, veteran traders at Itau’s asset-management unit, the fund charges 1.9% to 2.5% in management fees and 20% in performance fees.

Industry pioneers are also grabbing a slice. Andre Jakurski’s JGP Asset Management, which has more than 27.5 billion reais under management, posted inflows in recent years, as did Luis Stuhlberger’s Verde Asset Management, with over 46 billion reais in assets.

Though new shops are opening at a breakneck pace, their profitability and survival is hardly guaranteed.

“Asset management is a scale business,” Amatto, the executive recruiter, said. “You need to grow to be profitable and to perform. So I see many people who start with costs too high, underestimating the risks and the competition.”

Ninety new funds were created just this year, according to Anbima, but about 28 closed in the same period. To survive, some firms may need to merge to gain strength.

“There’s always room for asset managers that deliver returns,” said industry veteran Jose Tovar, CEO of Truxt Investimentos, which oversees about 18 billion reais. “The challenge is delivering -- and fast.”

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