Hot New Hedge Fund Defies Consensus on Bullish Brazil Real Bet

(Bloomberg) -- A Brazil hedge fund that saw its bullishness pay off last year has lined up another gutsy move to stay ahead of peers.

Legacy Capital Gestao de Recursos Ltda., created in 2018 by former executives at Banco Santander SA, says the Brazilian currency will rally beyond the 3.80 per dollar average forecast this year, though the recent comeback in U.S. and China trade war concerns make it hard to pinpoint exactly by how much.

“We see more premium in the Brazilian currency from now on than in any of the other assets we look at,” Felipe Guerra, Legacy’s chief investment officer and a former treasury director at Santander Brasil, said. “It could be a very strong movement and it’s the best bet even if the short-term global scenario got more tricky.”

The rally seen by Guerra would be a turnaround for the currency. The real is down 2.4 percent this year as concerns about trade war and turbulence in emerging markets from Turkey to Argentina roil developing-nation assets. The back and forth on pension reform negotiations, the flagship bill in President Jair Bolsonaro’s economic agenda, has also taken a toll on the currency.

Legacy’s bet on the real was made possible by what Guerra sees as a “global stabilization” compared to the beginning of the year as there’s been “better data across the board” for the world economy. “We’re not seeing a scenario of reducing stimulus and that’s bullish for emerging markets as a whole,” he said, adding he expects a positive outcome for the trade talks.

President Bolsonaro’s pipeline of asset sales, concessions and initial public offerings of state-owned companies may also play a part in the exchange rate, with more dollars coming in. That flow also hinges on Brazil being able to pull off a much-delayed pension reform, which Guerra expects to pass the Lower House by the third quarter of the year. He sees the overhaul bringing around 800 billion reais in savings in a decade, compared to 1.1 trillion reais in the government’s initial proposal.

U.S. Stocks

The volatility spurred by trade talks means “a buy opportunity for U.S. stocks,” a position Legacy has been increasing recently -- including non-Brazil related firms. He protects that bet by being “a little bit positive” on the dollar and receiving rates for the 10-year Treasury bonds. For local stocks, Guerra says the firm cut its exposure since the start of the year.

As for the local rates market, Guerra says the fund recently exited its positions after getting a payoff from betting on shorter-maturity notes when discussions of a possible benchmark rate cut started gaining steam. Now, that debate is on hold amid slower-than-expected progress on the reform agenda and higher-than-anticipated inflation figures.

The firm’s flagship Legacy Capital Master FIM posted a 15 percent total return since it launched in June, according to data compiled by Bloomberg. That was 9.7 percentage points more than the benchmark DI rate. The fund has already racked up 4.78 billion reais in total assets in that period and is now closed to new investors.

“We try to overlook short-term noise,” Guerra says. “If you have the reforms, Brazil could grow as much 3.5 percent for three years without inflation, a scenario I’ve never seen before.”

--With assistance from Shin Pei.

To contact the reporters on this story: Felipe Marques in Sao Paulo at fmarques10@bloomberg.net;Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Julia Leite, Peter Millard

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