Brazil Hedge Funds See Record Outflows Even as They Beat Market

By Alexander Ragir

Nov. 6 (Bloomberg) -- Brazilian hedge funds saw a record 14.3 billion reais ($6.7 billion) in withdrawals last month after returns trailed a fixed-income benchmark even while defying a 25 percent plunge in the Bovespa stock index.

The redemptions brought total outflows this year to 48.9 billion reais, shrinking the industry by 16 percent, according to data released by the National Association of Investment Banks yesterday. The rate of withdrawals is similar to hedge funds globally, even though the worst-performing Brazil funds lost a third as much on average as their overseas rivals.

Brazilian managers avoided declines even as the Bovespa plunged 41 percent this year. Investors withdrew money because they compare performance against fixed-income indexes, said Luiz Felipe Andrade, a director at the association known as Anbid. Bond yields in Brazil are among the highest in the world.

``Brazilian clients are used to getting high returns so they're very easily disappointed,'` said Jacopo Valentino, who oversees $4 billion as head of Latin American equities at BNP Paribas Asset Management in Sao Paulo. ``With the global crisis, hedge funds have become completely conservative right now, so they're gaining less'' than the fixed-income benchmark, the CDI.

None of the four classes of Brazilian hedge funds dropped more than an average 8.6 percent in October. The best-performing group gained 0.8 percent.

The CDI, Brazil's interbank lending rate, is 13.5 percent, and the country's banks are offering certificates of deposit that pay 14.2 percent annually, according to data compiled by Bloomberg. Only 78 of the 3,715 Brazilian hedge funds tracked by Bloomberg had a better return than the CDI this year.

Tripled in Size

The higher rates in fixed-income are luring back investors that had been shifting money to other investments, said Andrade. Brazil's hedge fund industry more than tripled in size this decade, growing to 300 billion reais by December, as the Bovespa rose nearly fourfold.

``This is the biggest problem with hedge funds in Brazil: The money allocated to them was moved from very conservative investments,'' said Andrade, who also is the executive director of Unibanco Asset Management, which oversees about $23 billion. ``They went from a money-market account and invested in hedge funds, so they are unhappy when there's volatility and it's causing a lot of redemptions.''

Brazil's real interest rate, the 13.75 percent target lending rate minus annual inflation of 6.25 percent, is 7.5 percent, the second-highest in the world. Turkey has the world's highest real interest rate at 7.55 percent.

Deepening Crisis

Two hedge funds run by Joao Pedro Senna, Capitania Hedge FI Multimercado LP and Capitania Long Short 30 FI Multimercado, gained about 10 percent this year, outperforming at least 94 percent of their peers, according to data compiled by Bloomberg. The funds still had redemptions as the global financial crisis deepened, said Senna, the investment manager at Capitania Asset & Risk Management in Sao Paulo.

The 66-stock Bovespa Index, which gets about half its value from producers of energy and raw materials, plunged 41 percent this year as banks' credit-related writedowns swelled to $690 billion and commodity prices dropped. The Reuters/Jefferies CRB Index of 19 commodities tumbled 24 percent.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals could shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote in a report to clients on Oct. 24.

20% Drop

The average hedge fund globally, measured by the HFRX Global Index, dropped 20 percent this year. In Brazil, none of the four classes of so-called multimercado funds dropped more than 6.2 percent in 2008 on average, according to Anbid. Brazil's multimercado funds with equity investments that use leverage, the most comparable to U.S. hedge funds, rose an average 7.3 percent.

Francisco Meirelles de Andrade's Nest Mile High 30 Fundo de Investimentto Multimercado gained 25 percent in 2008, outperforming 99 percent of its peers.

``We still had quite a lot of redemptions,'' said Andrade, who is buying Brazilian banks and real estate stocks on the expectation interest rates will fall. ``But the fact that all that money fled risk augurs well for 2009 because when things calm those people are going to come back.''

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net;