Brazil Hedge Funds See Biggest Outflows Since 2017 as Rates Rise
(Bloomberg) -- Brazil’s hedge fund industry is being tested as one of the world’s most hawkish central banks quickly increases rates, prompting investors to pile back into fixed-income products.
Investors pulled 13.4 billion reais ($2.4 billion) out of local hedge funds -- so-called multimercados -- in September, the most since December 2017, according to Anbima, the nation’s capital-markets association. That tops the monthly outflow seen in the aftermath of the rout sparked by the pandemic in 2020.
Hedge funds and equity-focused investment vehicles had been luring Brazilians at a record pace as they hunted for riskier, juicier returns amid record-low interest rates. But now that Brazil’s central bank has lifted the Selic rate by 425 basis points since March to 6.25% to try to contain raging inflation, the demand for fixed-income investments has taken off. With consumer prices rising at about 10% annually, the bank has signaled that another 100 basis-point hike is on the way for later this month with more hikes to follow.
“Local investors, for the first time in two years, now have the option of more interesting expected returns with a lower risk profile in fixed income rather than multi-market and/or equity-only mutual funds,” Morgan Stanley strategists led by Guilherme Paiva wrote in a report dated Sept. 28.
Brazil’s hedge fund industry has posted rapid growth in recent years, encouraging market veterans to ditch long careers at Wall Street banks to launch their own firms. The expansion also led lenders from Banco BTG Pactual SA to Itau Unibanco Holding SA and Brazil’s largest brokerage XP Inc., to scoop up minority stakes in new shops. Local hedge funds are still on track for a sixth-consecutive year of net inflows.
The average return of a basket of 241 Brazilian hedge funds tracked by Bloomberg in the three-month period ended on Oct. 4 was negative 0.5%, compared to a 1.2% gain for the benchmark CDI rate.
Fixed-income funds, on the other hand, lured 34.9 billion reais last month, according to Anbima.
“With interest rates set to move up in the next few months, we do not expect this trend to reverse,” BTG Pactual strategists led by Carlos Sequeira wrote in a report dated Oct. 1.
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