Foreign investors are becoming increasingly drawn to Brazilian hedge funds, attracted by the industry’s strong performance over the past few years. “This year, there’s been a really stark change in the market environment. Overseas investors were coming to Brazil in 2005 but it was really only in 2006 that they started to allocate money to hedge funds,” says Dara Chapman, relationship manager at Polo Capital in Rio de Janeiro, which has $220 million in offshore assets.
Behind this overseas interest lie three years of high returns. According to São Paulo consultancy Arsenal Investimentos, investable hedge funds returned an average 19.54% in the first 11 months of 2006 and have posted an enviable 156.41% since the end of 2001. The demand for product has encouraged the creation of several new funds. In the past 12 months, four new fund management companies opened shop and a total of 29 pooled funds were created, with just 13 closures, according to Gustavo Teixeira Coelho, asset allocation manager at Arsenal. Even more noteworthy is the growth in assets under management. These have nearly doubled and are at R$41.5 billion ($19.37 billion) from R$24.4 billion a year ago.
This combination of demand and performance is leading managers to launch new types of fund. Last year dedicated BRIC (Brazil, Russia, India, China) hedge funds emerged, including one launched by Templeton under Mark Mobius. Long/short equity funds are also increasingly popular as custodians and their clients open up to stock lending. Finally, funds of hedge funds are proving popular, especially for investors that want to ensure they are diversified in their Brazilian hedge fund exposure, says Fernando Lovisotto, partner at São Paulo-based Risk Office. Retail banks are also using funds of funds as a way of providing hedge fund exposure in the wide spectrum between high net worth and retail, he says.
Claritas Investments in São Paulo, for example, runs three funds of hedge funds that already account for $140 million or 15% of total assets. Global distribution is crucial to growing the business. Diversification of the client base reduces the firm’s reliance on the tight number of local banks that are the gatekeepers for onshore distribution.
HSBC is another firm focusing on funds of funds. It closed its first such vehicle, the HSBC FIC Multimercado Aquamarine, in November and around the same time launched a similar multi-strategy fund with a 25-working day redemption notice. “Two years ago it would have been impossible to talk to clients about a fund of funds that did not offer daily liquidity,” says Pedro Bastos, the new CEO of HSBC Investments in São Paulo. “Retail demand in Brazil is getting used to the idea that the very high level of real interest rates will not be available in the near future.”
