Capitania Asset & Risk Management | Mauá Investimentos | Fama Investimentos
IN OCTOBER, MIAMI hosted a conference entitled “Hedge Funds World LatAm 2005”. Running over three days it gathered the brightest and best Latin American hedge fund managers to discuss the opportunities of investing in the region. A week later, another conference, “LatAm Hedge Funds 2005”, took place, this time in Geneva, again attracting high-profile investors.
It would not be unusual for two events discussing the future of the US hedge fund industry to be arranged seven days apart. But for Latin America this was unprecedented, reflecting a growing interest in the sector there. The locations for the meetings were also significant. Latin American hedge funds are hitting the radar screens of foreign investors hunting for yield and therefore searching for the next big thing. Miami and Geneva are obvious homes of potential private investors.
Brazil is the main focus for these investors. Latin America’s biggest economy accounts for the vast majority of the region’s hedge funds. There are 109 Brazilian domiciled funds (which effectively can only invest in Brazil securities) according to data service provider Eurekahedge; another 97 are based offshore. These funds are producing healthy performances. Onshore funds are posting an average annualized return of 26.44%, while the figure for offshore vehicles is 17.78%.
In total these funds manage $23.7 billion, 75% of which is invested in offshore vehicles. The offshore funds face fewer regulations than their onshore counterparts. Onshore funds (which are open to local and foreign investors) can expose international investors to local interest rates and currency risks, whereas offshore funds are usually dollar-denominated. Both types have boomed over the past three years but the biggest growth has been in offshore funds. This year alone these have raised more than $8 billion, $600 million up on the previous year.
These figures will probably rise substantially over the next 12 to 18 months. Most Brazilian hedge funds have been approached by US and European private banks, high-net-worth individuals and fund of funds investors, which have been sniffing around São Paulo and Rio de Janeiro seeking investment opportunities.
When Euromoney visited one São Paulo hedge fund manager at the beginning of November he said he expected his offshore fund to receive more than $100 million from seven fund of funds vehicles from New York and London within the next couple of weeks. “These funds have already invested in Asia and in Latin America through global emerging markets funds but most don’t have exposure to Latin America locally,” he says. This is now changing. “We are getting five to 10 visits a month from international investors. A couple of years ago it used to be one a quarter,” he adds.
Another local investor, Luiz Fernando Figueiredo, who established Mauá Investimentos in January, tells a similar story. Figueiredo is a former deputy governor at the central bank and a co-founder of Brazil’s best-known hedge fund, Gávea Investimentos, which he started with his former central bank colleague Arminio Fraga, and Luis Fraga.
He says: “When I was at the central bank it was difficult to sell Brazil. Now we’re seeing record foreign interest in the country, mostly from US and European funds of funds, though also even from pension funds and insurance companies.”
Even hedge funds that are more reliant on local clients are reassessing their approach. Renato Abucham, a hedge fund manager with investment manager Claritas, says that his firm’s biggest challenge is to build a global client base. “We’re hoping to attract investors in the US, London and Geneva,” he says, adding that the firm has received visits in São Paulo from foreign investors that it has never even contacted before.
Another local investment firm, Fama Investimentos, opened its offshore Brazil Fund to international investors in February. The fund’s managers are roadshowing in London, Miami, New York, Paris and Zurich. So far the fund has $10 million of assets under management although the goal is to raise $200 million.
The long and the short
This growth in Brazil’s hedge fund industry is helping to change its dynamics. The most important is in the evolution in investment strategies. The presence of more international investors is encouraging Brazil’s hedge fund managers to adopt different styles. For offshore funds, for example, long/short equity is the most popular investment technique. American and European investors “have invested in diversified portfolios over the past 20 years so they understand the [hedge fund] concept. All they care about is track record,” says Ricardo Quintero, a founding partner at Capitania Asset & Risk Management.
International investors “have the right culture,” says Mauá’s Luiz Fernando Figueiredo. “They have experience of a ‘typical’ hedge fund. They are used to volatility.”
The question is whether Brazil’s local investors will follow their international counterparts’ lead and adopt a more aggressive approach. Brazil’s pension funds have a notoriously conservative outlook, conditioned largely by the country’s volatile economic and political history. When hedge funds first sprouted in Brazil over 10 years ago, most onshore funds were macro- and multi-strategy driven. Today, these types of funds still dominate but more hedge fund managers are adopting such strategies as fixed-income arbitrage, relative value and especially long/short equity for onshore funds.
“Most funds are redefining their strategies and trying to take advantage of opportunities,” says Jose Leopoldo Figueiredo, a director at Hedging Griffo, one of the pioneers of the Brazilian hedge fund industry. “Brazil has a very long history of investors making money in fixed income but now people are discovering value in equities.”