Citrone's Discovery Extends Losses to 12% on Brazilian Woes

(Bloomberg) -- Discovery Capital Management, the macro hedge fund run by Tiger cub Robert Citrone, suffered steep losses from the washout in Brazilian assets last week and declines in U.S. equities, according to people with knowledge of the matter.

The flagship fund fell about 6 percent in the first three weeks of May, bringing losses for the year to about 12 percent, said the people, who asked not to be named because the information is private. Patrick Clifford, an external spokesman for the firm, which manages about $7 billion, declined to comment.

Brazil was rocked last week by reports alleging that President Michel Temer approved hush-money payments to a lawmaker who orchestrated the impeachment of his predecessor. The nation’s benchmark stock index has since dropped about 11 percent in dollar terms, while the real fell 4 percent and local currency bonds lost more than 8 percent.

Traders are now expecting a smaller rate cut at this month’s monetary policy meeting than before the allegations surfaced, and S&P Global Ratings said it may downgrade Brazil’s sovereign credit rating because the nation’s fiscal reforms are at risk of stalling amid the turmoil.

Citrone told investors that the scandal dampened Discovery’s conviction in its Brazil thesis, leading the hedge fund to reduce its position in Brazilian equities and the currency, the people said. Still, he’s maintaining the firm’s wager that the nation’s interest rates will decline because it expects that inflation will keep falling.

Until last week, the nation had sustained a yearlong rally -- posting some of the world’s best returns -- on speculation that Temer would put an end to the worst recession in a century and win back an investment-grade rating. Overall, U.S. hedge fund managers took profits and reduced stock holdings tied to Brazil by about a net total of $800 million from the start of the year through March 31, according to data compiled by Bloomberg.

Citrone is keeping his bullish U.S. equity wager on the belief that Congress is focused on cutting taxes. Stocks slumped last week amid political turmoil from allegations that President Donald Trump attempted to derail an FBI probe of his former national security adviser. They have since rebounded.

One of many hedge fund managers dubbed a Tiger cub after working at Julian Robertson’s Tiger Management, Citrone founded Discovery in 1999. Last year, his main hedge fund rose about 11 percent.

--With assistance from Hema Parmar Aline Oyamada Julia Leite and Ye Xie

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski, Katherine Burton