Hedge-fund fever was exploding in Brazil. With interest rates at historic lows and the wealthy clamoring for new ways to mint money, traders were leaving banks in droves to set up their own shops along the beach in Rio de Janeiro and in fashionable Sao Paulo neighborhoods.
(Bloomberg) — Hedge-fund fever was exploding in Brazil. With interest rates at historic lows and the wealthy clamoring for new ways to mint money, traders were leaving banks in droves to set up their own shops along the beach in Rio de Janeiro and in fashionable Sao Paulo neighborhoods.
At its zenith during the pandemic, so much money was flying around that the window to invest in the hottest funds opened and closed in just seconds. The number of asset management firms almost doubled to a record.
The boom didn’t last long. When policymakers began aggressively hiking rates to fight inflation, Brazilians went back to what they know best — parking their cash in government bonds paying double-digit interest rates. The riskier bets on stocks and corporate bonds that the new hedge-fund types were dialing up quickly lost their appeal.
Investors yanked 87 billion reais ($17.6 billion) from hedge funds in 2022, halting six consecutive years of new money, and have pulled another 47 billion reais so far this year. The impact has been felt far and wide. Some top managers gave up bonuses in order to pay their teams in full; others pulled from their own savings to keep the lights on; several new shops, including ones formed by veterans from Credit Suisse Group AG and Deutsche Bank, have shut down.
Most, though, are still scraping by. This has created, as one industry executive put it, a hoard of “living dead”: Funds that are operating with a fraction of their initial staff and trying to come up with new investment strategies. They’re not raising money and, in many cases, are just managing their own assets.
It’s another setback for Brazilian markets, whose development has long been thwarted by the irresistible allure of high yielding government bonds. When rates fell into single digits, then record lows, it sparked a surge in corporate bond sales and equity offerings. The demand for new products skyrocketed, and the most popular hedge funds closed for new money. With that, came the new shops. The number of asset management firms, which had long hovered around 500, soared to almost 1,000.
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Now, two-thirds of local asset managers manage less than 1 billion reais ($203 million.) While that figure includes some funds that are still launching despite the pullback, it’s also telling of the failure of the structural change many saw for the industry.
“This hangover isn’t done yet,” said Guilherme Ferreira, partner at hedge-fund manager Jive Investments, which has 17 billion reais in assets. “The fund management business needs scale.”
After emergence of several dozen new hedge funds captained by former banking executives in the past seven years, the money managers that failed to reach their planned capacity are struggling to cope with costs — signaling that Brazil might be poised to enter a phase already experienced by more mature markets. In the US, for instance, the largest hedge funds continue to get bigger, while it has become harder to raise money for smaller shops. Overall, assets for the American hedge-fund industry have remained around the $4 trillion mark.
There’s no shortage of big Brazil names caught up on the crisis. Reinaldo Le Grazie, a former director of monetary policy at the nation’s central bank, joined Panamby in 2019 to launch a new hedge fund. He was seeking to raise as much as 5 billion reais, lured senior money managers and built a 30-person team. Four years later, Panamby manages about 340 million reais — 40 million reais in its hedge fund —, and slashed its headcount by half after creating a credit fund and partnering with a local firm to provide portfolio-management services for individuals.
“Brazil’s asset-management industry was booming when I was a central bank director bringing down interest rates,” said Le Grazie, adding that eventually “we realized that the good times were definitively behind us.”
Sylvio Castro’s Grimper Capital, created after he left his post as chief investment officer for Credit Suisse’s private-banking unit in Brazil, quickly ramped up only to shut about two years later amid the souring mood, tougher competition for clients and talent. Castro and his team went on to take jobs at Julius Baer. Macro Capital — also created by Credit Suisse veterans — and Amago Gestao de Investimentos Ltda are other examples of firms launched since 2016 that have already closed.
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Many others, such as BlueLine Asset Management, have begun consolidating. BlueLine absorbed Greenbay Investimentos, while AZ Quest acquired rival MZK Investimentos. Jive merged with Maua Capital, which specializes in real estate funds, and is looking for other acquisition opportunities, which Ferreira says are “growing every day.”
Even powerhouses are struggling. Verde, whose legendary flagship fund is up more than 23,000% since its 1997 inception, saw assets under management plunge by half in about two years, to 27 billion reais. Constellation Investimentos e Participações Ltda, backed by Brazilian billionaire Jorge Paulo Lemann and Stephen Mandel’s Lone Pine Capital LLC, is managing about 7.5 billion reais, half what it once did, and moving to an office with a cheaper rent.
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The central bank has begun easing policy again, but with rates at 12.75%, just a hair under where they were in 2016, the performance bar funds have to clear remains high. In the past 12 months, 71% of members in a basket of local hedge funds tracked by Bloomberg have trailed the CDI benchmark rate.
“In Brazil, the smaller asset managers face more challenges, specially in a bad cycle of the market,” said Florian Bartunek, chief investment officer and co-founder of Constellation. “But the cycle is starting to improve, and the majority, the ones that can show good returns, will survive.”
Data from capital markets association Anbima shows outflows are slowing, with hedge funds even seeing a monthly net inflow last month.
But any improvement “would not happen in a balanced way, and the more recognized and consolidated firms should raise money ahead of other less structured players,” said Gustavo Pires, partner and head of asset management services at XP. He expects the scenario to remain challenging for smaller asset managers for the next 12 months.
“The process of consolidation in the fund industry is just beginning,” he said.
–With assistance from Katherine Burton.
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