Another Hedge Fund Is Born in Brazil as Low Rates Juice Inflows

(Bloomberg) -- A group of seasoned asset-management executives is creating a new firm in Brazil, enticed by record inflows to the local hedge fund industry.

Frontier Capital will launch its first fund in February, founding partner Rodrigo Fonseca said in an interview. It will feature two parallel strategies: an active selection of Brazilian stocks, which will account for most of the investments, and a mostly passive approach that combines various global asset classes to seek protection from economic upheaval, he said.

Fonseca, 47, said he hopes the mix will leave his fund less vulnerable to slumps that other equity-focused long-biased funds faced during the depths of the pandemic-fueled market rout in March.

“We wanted to build a portfolio that was more defensive compared to other long-biased funds,” said Fonseca, who’s also Frontier’s chief investment officer. “The problem was that we didn’t want to leave cash parked in low-yielding government bonds, so we came up with a global portfolio.”

The rationale highlights some of the ongoing changes in Brazil’s fund industry. Thanks to the nation’s historically high interest rates, whenever an equity-focused hedge fund wanted to stick to a more defensive portfolio, a usual move was to park some cash in risk-free government bonds linked to the benchmark rate -- which was as high as 14.25% in 2016. Since then, the central bank has cut rates to a record low 2%, forcing managers to get creative.

Low rates also proved to be a boon for Brazil’s asset-management industry, resulting in record inflows and the rapid formation of new hedge fund shops -- more than 30 in the past two years -- like Sao Paulo-based Frontier.

Fonseca, who has worked in the local hedge fund industry for more than two decades, founded the firm along with Alexandre Cancherini, 41, a former portfolio manager at Banco Santander SA’s Brazil asset-management unit, and Eduardo Cotrim, 39, who spent more than six years at Franklin Templeton’s Brazil unit. They plan to bring in two more partners early next year and amass 2 billion reais ($390 million) of assets before closing the fund to new investors.

For their global strategy, Fonseca said he drew inspiration from Bridgewater Associates founder Ray Dalio’s All Weather fund, a passive long-only strategy that seeks protection from market turmoil by investing mainly in a combination of stocks and bonds.

“We’ve put this portion of our portfolio together by following the All Weather’s philosophy laid out by Dalio,” Fonseca said.

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