First Avenue Partners, a hedge fund advisory firm based in New York and London, is raising money for a new multi-strategy fund of hedge funds investment vehicle that will focus on Brazilian managers. The fund, which will be managed by Brazilian investment boutique Arsenal Investimentos, plans to raise $300 million.
The Arsenal fund provides investors with access to offshore and onshore Brazilian hedge fund managers active in Brazilian financial instruments. It aims for minimum returns of 15%, with strategies including discretionary macro equity hedge, fixed income, equity arbitrage and long/short equity.
There are 350 single managers in Brazil and they are set to become a stronger force as the Brazilian investment fund industry continues to experience healthy growth. Total assets under management grew 94.83% between December 2000 and June 2007, reaching $539 billion.
In line with this growth, investment strategies have broadened – by the turn of the year there were already three quantitative funds open in Brazil: Principia, SLW and Capitania Vector. A fourth is due to launch in April. The quant funds illustrate clearly the growing potential of the Brazilian hedge fund market and its improving liquidity, especially in blue-chip investments.
But some market observers are wary. According to hedge fund database Eurekahedge, 2007 was a good year for hedge funds in Latin America, with average annual returns across the region at 15%. However, in the second half of the year returns were dented as liquidity constraints, tightened credit conditions and heightened volatility affected performance, especially for those using long/short strategies.
"Success in 2008 is likely to be found through more concentrated portfolios – we areseeing this shift across the industry," says Marilisa Cardoso, head of sales at Mauá Investimentos. "We reduced our long/short equity book and we added more global hedges on the fixed-income side. We are now trying to keep the book simpler and more concentrated on the bets we like the most."
Leo Figueiredo, managing director at Credit Suisse Hedging-Griffo, says: "The problems we are seeing in the international markets now will teach Brazilian managers a lesson – we can see the danger of taking on high levels of leverage. I think fund managers are now more cautious with the leverage they take out."
He adds: "The Brazilian economy is full of great growth stories. There are still some great investments that don’t require taking on leverage or following complex strategies in order to make good returns."