Magazine issues » December 2011

HEDGE FUNDS: A wealth recovery

Private jetThe Brazil hedge fund industry has seen many launches in recent years, but is now on a plateau. The recovery in wealth management globally may help drive the industry, says Nick Fitzpatrick.

But there seems little chance of local pension fund involvement News that the world’s wealth market is fully recovered from the financial crisis will be welcomed by the Brazilian hedge fund industry, which is primarily driven by high-net-worth individuals.

The number of hedge fund launches in Brazil peaked in 2010 and has trailed off since then to stand at 86 funds located in Brazil with assets of $8.8 billion, according to eVestment, a data provider based in the US.

Whereas US pension funds are significant investors in hedge funds and their European counterparts have been increasing allocations over the past decade, the Brazilian pension fund market is less involved in its local industry.

With a significant bias for domestic equities and a propensity for traditional long-only strategies, these funds do not venture out much into the world of hedge fund investment. It is wealthy people from within and outside of Brazil that provide most business to the industry.

“The typical underlying investors [in Brazil hedge funds] are both local and foreign high-net-worth individuals who invest either directly or through wealth management platforms and funds of funds,” says Peterson Paz, of the investor relations department at Victoire Brasil Investimentos, a São Paulo-based investment management firm that runs a long/short equity fund. “Brazilian pension funds are allowed to invest in hedge funds, but only few of them do that.”

Given the reliance on the wealthy, it is fortunate that Latin America should be producing a significant amount of millionaires in the next few years.

Matia Grossi, senior analyst, private wealth management at Datamonitor Financial, part of London-listed Informa, says: “We expect to see some half a million new millionaires each year between now and 2017. The US and Asia Pacific will be the strongest performers with significant growth also expected from Latin America.”

Hedge funds tableDatamonitor Financial produced a report in June, The Global Wealth Market 2013, and predicts that the global wealth market is set for years of strong growth and that the number of worldwide millionaires will reach 9.9 million by 2017.

However, although there are no signs that Brazilian pension funds are going to increase allocations to hedge funds any time soon, there are certain signs they feel they can no longer rely on their home markets alone for returns. Brazilian markets face significant pressures despite having the weight of one of the “big four” Brics economies of Brazil, China, Russia and India behind it.

Pension funds are getting more adventurous.

Rene Sanda, the chief investment officer of the country’s largest pension fund Previ, which exists for workers of the state-controlled bank Banco Do Brasil, told the Wall Street Journal in April that the fund is considering investing 300 million Brazilian reals ($150.7 million) in shares of foreign companies this year. It was reported that the decision was taken after conversations with other funds, including state-run bank Caixa Economica Federal, and Valia, for workers of mining giant Vale, who all agreed there was a need to invest abroad.

The Brazil pension funds industry stands at around $500 billion.

Most onshore Latin American hedge funds are structured as multimercado funds in Brazil, which can be sold to different types of investors including institutional investors such as pension funds.

Pension funds missed some good performance in 2012. According to Eurekahedge, a hedge fund data firm, in terms of strategic mandates of Latin American funds, the strongest performance in 2012 was posted by long/short equity funds, which reported gains of 12.73% during the year.

The funds posted substantial outperformance over the underlying markets, which were up 6.68% during the year, as many managers realised gains from exposure to the region’s infrastructure opportunities
by investing in the equities of developers and other related firms, Eurekahedge’s Farhan Mumtaz says.

Some managers gained from increased regional corporate activity, like the merger of LAN and TAM airlines.

The Eurekahedge Latin American Hedge Fund Index’s aggregate return was 10.4%.

Most long/short equity funds were able to avoid the losses incurred by event-driven funds as their portfolios tend to be more diversified on the long side and have greater protection through short exposure.

Latin American hedge funds returned 1.14% year-to-date May this year. The region’s markets were down over the same period with the MSCI Latin America Index losing nearly 8%  and the Ibovespa, the main Brazilian stock index, losing more than 12%.

For the industry’s US$-based investors, they would also have been hit as the real depreciated against the US dollar.

Regardless of whether it is pension funds or a new batch of millionaires that lift the hedge fund industry’s inflows in the years to come – and increase fund launches from the current plateau – Paz, at Victoire Brasil Investimentos, expects investors to seek hedge fund expertise in the face of economic pressure.

“As far as Brazilian investors are concerned, longer periods of low local interest rates could increase demand for hedge funds and accelerate the search for more sophisticated products with global exposure. However, the current upward trend for interest rates will be a challenging environment.”

Peter Laurelli, at eVestment, sees signs of global exposure emerging. A higher percentage of newer funds target emerging market bonds.

And despite the plateau of fund launches, he believes that the data (which can be skewed by some funds who do not report until later down the line) is positive.

“Although there are only six funds launched reporting to us from 2012, five years down the road that number for 2012 will likely increase significantly [once more funds report]. I think the launch data is encouraging based on counts from 2012 and 2013.”

©2013 funds global latam

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