Hedge Fund SPX Offers Mea Culpa for Wrong-Way Brazil Bets

Brazilian hedge-fund behemoth SPX Capital apologized to holders of one of its funds after a badly timed bet on its home country eroded returns.

(Bloomberg) — Brazilian hedge-fund behemoth SPX Capital apologized to holders of one of its funds after a badly timed bet on its home country eroded returns.

The money manager’s Raptor fund — a more aggressive version of its flagship Nimitz offering — lagged all 173 rivals tracked by Bloomberg in the first half of the year, slumping 9.7% after fees. June was particularly painful as the fund posted its second-biggest monthly drop on record.

The poor performance led SPX founding partner Rogerio Xavier to write a mea culpa letter to clients, saying wrong bets on Brazil have been the main culprit for the lackluster returns of the firm’s macro hedge funds in the past quarters. 

“Our performance in the past nine months has been disappointing, to say the least,” Xavier wrote in the note seen by Bloomberg. 

SPX initially had a bullish view on Brazil with the election of President Luiz Inacio Lula da Silva, but the leftist leader’s fiery rhetoric led to a sharp selloff in the country’s equities, currency, swap rates and bonds at the end of last year. As lawmakers pared back some of his proposals, asset prices rebounded. But by that time SPX had already ditched some of its Brazil holdings. 

“We couldn’t separate the noise and also didn’t give the real importance to the legislative power’s control,” the letter said. “We need to improve our understanding about Brazil.”

It wasn’t all bad news for SPX in the first half, though. Its equity hedge fund SPX Hornet Equity Hedge, which debuted in November, gained 12.8% after fees in the first six months of the year, the best performance among Brazil hedge funds tracked by Bloomberg. The fund combines long and short equity bets and is mostly market-neutral.

SPX’s macro hedge funds are currently betting on lower rates in Brazil, and hold a neutral position in local stocks. The funds, which still top 86% of peers in the past 24 months, also have long positions on the US dollar against currencies it didn’t name. Other bets include short positions in industrial metals and exposure to high-yield credit in developed nations. 

Read More: Brazil’s Core Inflation Ticks Down, Raising Hopes for August Cut

Xavier said he still expects inflation-adjusted interest rates to be positive in developed economies over the next 10 years, while global inflation should prove stickier than expected. He favors fixed-income assets over equities.

“Fixed income will be the protagonist in the next 10 years or more,” Xavier wrote, adding that he sees no issues with SPX’s business model, team or strategy of expanding globally. 

SPX, which was created over a decade ago in Rio de Janeiro and manages over over 67 billion reais ($14 billion), declined to comment beyond the letter. It has almost 300 employees, with six offices across the globe. 

The Brazilian hedge-fund data monitored by Bloomberg include only so-called multi-market funds with more than 500 million reais in assets, and excludes those with single shareholders. Overall, the group’s average performance was positive in the first half, with a 4.9% total return before fees. 

The Ibovespa, Brazil’s benchmark equity index, was up 7.6%. The so-called CDI rate, a benchmark for local hedge funds, rose 6.5% in the span. 

(Updates with additional bets in eighth paragraph.)

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