Hedge Funds in Brazil Are Doing Just Fine—Just Ask Bahia

December 19, 2018 Updated: December 20, 2018

Brazilian investors are flocking to Bahia.

Not the sunny, coastal state in the nation’s northeast, but an asset manager that had around 7.7 billion reais ($1.98 billion) in net inflows in its two main funds this year. The amount puts it among the Brazilian hedge-fund firms with the most new money coming in, according to data compiled by Bloomberg.

“Our performance got better, our team more experienced and we got more well-known, which brought in exponential inflows,” Gustavo Daibert, a partner responsible for equities strategies at the firm said in an interview at Bahia’s headquarters in Rio de Janeiro. “Today, the only reason we’re not bringing in more money is because we decided to close some funds, but demand is still very strong.”

The firm, which now oversees 17.3 billion reais, is betting on equities like never before in hopes of meeting investors’ enthusiasm. The move follows the election of Jair Bolsonaro as Brazil’s next president, on the expectation the former army captain will deliver on promises of fiscal discipline and a much-delayed pension system overhaul. Bahia prefers stocks over other assets in its flagship fund, but the optimism is starting to reach the currency too: the fund is building a bullish position in the real, which Marcelo Mendes, the partner responsible for fixed-income strategy, says is cheap at current levels.

“It’s something we’ve only started doing,” Mendes said. “Everything that’s cheap can get even cheaper, but we’re seeing the market as very one-sided on this.”

So far, it hasn’t paid off. Bahia said it has lost money betting on the real as the currency slipped 6.8 percent since the October election, with foreign investors increasing their bearish positions even as local funds have gained confidence.

Investors abroad still see Bolsonaro “as a right-wing populist,” Mendes said, adding that the pension overhaul has become “the mother of reforms in the eyes of foreigners,” and getting it approved would win over reluctant offshore investors. It would also help differentiate Bolsonaro from Andres Manuel Lopez Obrador, Mexico’s first leftist president in decades who has roiled markets by promising to cancel a partially built airport in the nation’s capital, raising doubts about contract sanctity.

Benefit of the Doubt

“Investors dedicated to emerging markets have suffered a lot this year, with Argentina, Turkey, and Mexico,” Gustavo Daibert said. “They are not willing to risk giving Bolsonaro the benefit of the doubt.”

Brazil’s benchmark equities index is up about 14 percent this year, one of the best among major global gauges, and approving a pension overhaul could prompt it to rally more than 30 percent, Daibert said. Even a watered-down version of it could send the index up 15 percent.

The firm’s flagship hedge fund, Bahia AM Marau, ranks among the nation’s best in the past five years, with an annualized total return of about 15 percent, beating 97 percent of Bloomberg peers.

The equity portion of the fund has been scooping up financial shares and now has state-owned lender Banco do Brasil SA as it’s biggest holding. It’s a wager that Bolsonaro’s administration will deliver on pledges of better governance and privatizations of state-controlled assets. Bahia is also betting on other sectors exposed to domestic consumption, such as shopping malls, while going short on financial-services firms.

While Bahia’s current structural position on stocks is its biggest ever, Daibert says there are risks the government runs into problems as it tries to break with politics as usual—namely, offering cabinet posts to allied parties to form a working majority in Congress.

“Bolsonaro is trying to implement a new model of negotiations between the executive and legislative powers. If he fails, it will be very tricky to turn back,” he said.

New Money

The large volume of inflows this year has led Bahia to close the flagship to new investments as it adapts to its new size and tries to better understand the behavior its new clients—some of whom are retail investors unfamiliar with hedge funds. The success is also part of a boom in Brazilian hedge funds, which have multiplied as the industry opens up products that were previously restricted to wealthy individuals and as easy returns fade amid lower interest rates.

Mendes said Bahia could practically double its assets, but it’s in no rush. The firm has 80 employees, and made a small expansion at the beginning of 2018, adding analysts to cover Asian currencies and global stock markets.

Even with the firm’s success, Mendes, who graduated as a mechanical engineer, has been spending much of his time focusing on the things that could go wrong. The book he cites as his most influential read this past year is “Big Mistakes: The Best Investors and Their Worst Investments,” about the biggest blunders by investors like Warren Buffett and Bill Ackman.

“Losing money is a part of what we do,” he said. “I call it an expensive doctorate degree: it’s painful, costs money, but you have to learn something from it.”

By Felipe Marques & Peter Millard

From Bloomberg