Major Brazil funds hit by market rout as scandal threatens Temer

SAO PAULO Several Brazilian hedge funds suffered their worst one-day losses in at least a decade on Thursday after the country’s financial markets were slammed by a graft scandal threatening to topple President Michel Temer and his reform agenda.



High-risk Alaska Black LP68086772 lost 28.02 percent on Thursday, after turning in the top performance among Brazilian hedge funds tracked by Reuters in 2016 with a 129 percent return.

Manager Henrique Bredda said around half of the losses in the fund, formally known as Alaska Black FIC FIA – BDR Nível I, came from transactions involving different maturities in the yield curve.

Brazilian markets took a beating on Thursday on reports Temer had been caught on tape condoning bribes to silence a key witness in Brazil’s biggest-ever graft probe, fueling calls for his removal from office. Temer strongly denies any wrongdoing and has said he will not resign.

Yields on interest-rate futures <0#2DIJ:> spiked, with all contracts hitting a daily oscillation limit. The fact that longer-term interest rate futures have wider limits than shorter-term ones worsened the volatility in the fund’s holdings, Bredda said.

According to data from securities regulator CVM, Alaska Black held 371 million reais ($114 million) in assets under management at the market close on Wednesday.

Cross-asset fund Adam Macro II FIC FIM LP68371236, which held a total of 2.9 billion reais in assets on Wednesday, unwound all of its positions in Brazil, swallowing a 6 percent loss on Thursday.

“We’ll wait until the dust settles before getting back to Brazil,” founding partner André Salgado said. “Even if the scenario improves, it’s better to miss out on the start of the rally than to remain exposed to so much uncertainty.”

Salgado said many investors had found themselves over-exposed to Brazil after a rally that made its local currency and stock market among the world’s best performers last year.

Traders had cheered efforts by the center-right’s Temer, who replaced ousted leftist President Dilma Rousseff, to pass austerity measures and pro-business reforms.

LIMITED LOSSES

A few major players managed to limit the damage from this week’s losses, having hedged their bets in recent months.

Verde Asset Management SA, Brazil’s largest hedge fund, saw its holdings shrink by just 3 percent on Thursday, according to preliminary performance data obtained from market sources.

That compares to an 8.8 percent drop for Brazil’s benchmark Bovespa stock index and an 8 percent slump in the Brazilian real BRBY that day.

Verde had repeatedly warned that investors were too optimistic about Congress passing Temer’s ambitious pension and labor reform agenda, calling markets “complacent” in a monthly letter on May.

The performance data seen by Reuters showed that 11 percent of the holdings of the Ibiuna Hedge STH FIC FIM cross-asset fund LP68190997 were wiped out on Thursday, the biggest daily decline since it opened in 2012.

If confirmed, that nearly erased the fund’s gains this year, which had reached 12.6 percent by market close on Wednesday, when it held a total of 1.2 billion reais ($363 million) worth of assets, according to CVM figures.

Representatives for Verde and Ibiuna declined to comment.

This week’s losses came as Brazil’s hedge fund industry was clawing its way back from a years-long slump, as a deep recession and sky-high interest rates dampened the allure of active investment strategies.

Contracts pegged to Brazil’s benchmark CDI rate have yielded 4.4 percent so far in 2017.

($1 = 3.31 reais)

(Writing by Bruno Federowski; Editing by Tom Brown and Christian Plumb)