Investors Flee Brazil Hedge Funds After Surge in Interest Rates

(Bloomberg) -- Brazilian hedge funds are hemorrhaging money as the sharp rise in interest rates increases the appeal of safer bets in fixed-income assets. 

Investors pulled about 12.5 billion reais ($2.2 billion) out of domestic hedge funds in October, according to Brazil’s capital-markets association Anbima. It comes after a 13.4 billion reais net outflow in September, the biggest monthly withdrawal since 2017.

The hedge fund industry has seen a sudden reversal of fortune in recent months as the central bank embarked on interest-rate hikes that have lifted the Selic benchmark by 575 basis points since March to 7.75%. The moves are meant to combat soaring inflation, and policy makers have signaled there are more to come. Following the biggest rate increase in two decades last month, economists are now forecasting the key rate will climb past 10% before the monetary tightening cycle ends.

Years of falling rates had encouraged Brazilians to ditch local government bonds and other fixed-income products as they hunted for better returns in riskier investments. The number of mom-and-pop investors dabbling in the stock market skyrocketed, while the hedge fund industry expanded quickly.

Higher rates should damp economic growth and could lead retail investors to start rotating back into fixed income, according to Bank of America Corp.’s Latin America equity strategist David Beker. Brazil’s Ibovespa equity index has tumbled 12% this year, the worst performance among major gauges tracked by Bloomberg.

“Outflows from hedge funds and equity products may worsen,” he said in an interview. 

Fixed-income funds saw a net inflow of 17.4 billion reais last month, pushing the year’s total intake to 255 billion reais, according to Anbima. That’s the most on record for any January-to-October period since it started compiling the data in 2002. 

“With interest rates moving up fast and set to rise even more in the months ahead, this trend sure doesn’t look like reversing,” BTG Pactual strategist Carlos Sequeira wrote in a report dated Nov. 1. 

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