XP Hedge Fund Makes the Most of Brazil Election With Derivatives

(Bloomberg) -- A near-fatal stabbing, a jailed former president vying for another term and record-breaking market rallies. Brazil’s presidential election had it all, and one equity hedge fund made the most of it.

XP Long Biased, a 2 billion-real ($540 million) fund managed by XP Asset Management, flew past its peers with an almost 12 percent return from when the race for Brazil’s presidency officially started on Aug. 15 through Oct. 30, the most recent data available. It won by betting one of the candidates would come out of the election’s first round with a decisive edge over the other, an outcome that would probably curb volatility after the final result three weeks later.

“We believed there would be a migration of votes to one of the candidates before the first round and we would walk out from it with a clearer picture on who the winner would be,” Joao Braga, co-head of XP Asset Management, said in an interview in Sao Paulo.

Braga’s analysis was spot-on. The former army captain Jair Bolsonaro, whose top economic adviser promises privatizations and other market-friendly policies, came close to the majority needed to win the vote in the first round on Oct. 7, surpassing all the polls. Bolsonaro then won the Oct. 28 runoff, beating Fernando Haddad, the leftist former mayor of Sao Paulo, with 55 percent of the vote.

XP Hedge Fund Makes the Most of Brazil Election With Derivatives

Braga, who leads the asset manager with Marcos Peixoto, said the market was pricing in much more volatility after the second round than in the weeks following the first, a sign of a broad expectation that the election winner wouldn’t be clear until the very end.

To put in place their contrarian call, XP’s team combined different maturities of options for the state-owned oil giant, Petroleo Brasileiro SA. The move consisted of selling a November-maturing option and buying a larger number of shorter-term ones.

The bet paid off when the first-round results pushed Brazil’s benchmark equity index up by the most in two years on the day after the vote, making it the best global performer among 94 indexes in October. From Aug. 15 to the end of October, the real rose 5.6 percent, posting the second-best performance among emerging-market currencies.

The XP fund now has Petrobras -- as the oil company is known -- as its second-biggest holding, Braga said. Earlier this year, the fund had sold all its shares in company, data compiled by Bloomberg show. Banco Bradesco SA is now its biggest holding, he said. The fund also has the best five-year total return among its peers, at 314 percent.

Rounding out the list of the top three performers after the election are two flagship funds from Brazil’s independent asset managers: Kapitalo’s Zeta fund and SPX’s Raptor fund. They gained 9.5 percent and 6.3 percent, respectively. The data include only the so-called multi-market funds with more than 1 billion reais in assets and excludes those with single shareholders. Overall, the group’s average performance was positive, with a 2.3 percent total return.

SPX Gestao de Recursos Ltda. declined to comment and Kapitalo Investimentos didn’t reply to an email.

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