Hedge funds bet on foreign assets and do well for themselves even during times of crisis
As soon as the regulations for foreign investments created a favorable environment for taking advantage of opportunities abroad, Gávea Investimentos was one of the companies to start a portfolio focused on purchasing foreign assets. The result was positive. Constituted in July 2008, the Gávea Plus FIC FIM accumulated a profit of 4.66% from January to April – a return of 1.96% percentage point above the Interbank Deposits Certificate – CDI. This investment fund has 95% of its equity in the Gávea Master Plus FIM, which, in turn, invests 20% of its equity abroad. Last year, the equity fund's shares rose 22.34%, 12.44 percentage points above the CDI of the time. “In a moment of strong depreciation of global assets, these funds are doing very well” says Rodrigo Fiães, a partner in the customer relations division of the asset manager which is owned by a former Brazilian Central Bank president, Arminio Fraga. The fund's net equity was R$ 211.2 million at the end of April.
“Holding foreign assets ends up being a differential for us and amplifies the possibilities of allocating investments” says Fiães. In a moment such as the present one, in which the solvency of the shares and bonds of European companies in countries with substantial public debt is under question, fund managers can direct their resources to emerging Asian and South American countries that are currently in better fiscal and economic shape. Gávea does not elect any class of assets in particular on which to concentrate its operations , which can involve currency, interest rates, or equity. The firm's investment decisions are based on an evaluation of the most likely future macro-economic scenario, a technique known as “top down”. Fiães states: “We have a short position in euros because we believe there are structural problems in that region”.
The way now open for global market operations – in which some classes of assets offer more liquidity – is being increasingly used by Brazilian fund managers. In Brazil, the three predominant lines of assets – foreign currency, fixed income and equity – heighten the correlation among domestic funds and produce very similar returns. To differentiate themselves, hedge funds are looking for profitable assets abroad, which present themselves as instruments for increasing profit and portfolio diversification. “The best opportunities are not necessarily here”, affirms the CEO of Ashmore Brasil, Eduardo Camara Lopes.
Ashmore Brazil, a subsidiary of the British asset manager Ashmore, took the same path as Gávea. They launched a hedge fund called Ashmore Brasil FIM that invests 20% of its equity in foreign markets. The fund for new shareholders, the Ashmore Brasil 30 FIC FIM LP, invests its net equity in this master fund. Its shareholders include companies and high net worth individuals. About R$ 54 million, or 20% of the fund's R$ 270 million equity as of April 30, is allocated to emerging Asian and South American countries such as South Korea, Russia, Turkey, Brazil, Chile and Colombia. Year-to-date as of May 26, the fund has returned 0.34 percentage points more than the CDI, i.e., a 3.7% return compared to 3.36% from the inter-bank deposit rate. Generally speaking, the return has been good, according to Lopes. In 2009, the fund rose 17.68% versus a CDI of 9.88%.
AN ALTERNATIVE FOR THE FUTURE – With their diversified portfolios, these funds show promise for attracting major clients, such as pension funds. Valia, the Vale mining company's pension fund with R$ 12.5 billion in equity, is looking at foreign assets with increasing interest. Resolution 3,792 by the National Monetary Council (CMN), issued in September 2009, extended the limits for investing in hedge funds from 3% to 10%. As a result, pension funds are paying more attention to this class of assets.
“Our teams are carrying out technical studies on risk and return. We consider hedge funds an alternative for the future” says Valia’s investment and financial director, Mauricio Wanderley: the supplementary retirement entity’s investment portfolio is composed basically of 62% fixed income assets, such as long-term federal bonds, and 30% equities.
The CVM’s green light for hedge funds came in Instruction 450 of March 2007, which permitted hedge funds to invest up to 20% of their equity in foreign assets. Other funds could invest 10%. The rule’s objective was to enable Brazilian investments during “scenarios of lower profitability from government bonds, which for many years were the prevailing assets invested in by Brazilian funds”, says the text of the regulation. Later, in February 2008, Instruction 465 expanded the permitted investment proportion to 100%.
Taking advantage of its fund managers’ international experience, Gávea was one of the first companies to launch a fund that invests all of its equity abroad. From January to April, the return of Gávea Investimento no Exterior FIC FIM, which invests 95% of its shares in the Gávea Master Investimento no Exterior FIM, was of 7.46%, 4.77 percentage points more than the CDI. On April 30, the fund's net equity reached R$ 224.1 million. “Armínio (Fraga) had professional experience abroad, which gave us confidence to release a product with this profile” says Fiães. Before presiding Brazil’s Central Bank between 1999 and 2003, Armínio Fraga worked in institutions such as Soros Fund Management and Salomon Brothers, in the United States.
However, the demand for hedge funds that invest all their equity in foreign securities is insignificant, for a series of reasons. One is a lack of knowledge about a variety of markets. “Since these products have a low correlation with Brazilian assets, it is necessary to certify that the fund manager has thorough knowledge of where it is investing” stresses Lopes from Ashmore. At a date to be defined, Ashmore intends to launch a fund 100% focused on foreign opportunities.
Another factor that discourages the existence of these funds is their elevated initial ticket of R$ 1 million, as determined by Instruction 465. In funds that invest up to 20% of their assets abroad, the minimum ticket is up to the fund manager. Whilst Sparta Commodities FIM requires an investment of R$ 5 K, the Gávea Plus FIC FIM asks for R$ 300 K. Ashmore Brasil 30 FIC FIM LP requires an initial investment of R$ 100 K. “100% funds are for investors that want very specific assets, such as foreign government bonds”, comments Ulisses Nehmi, investment manager at the São Paulo asset manager Sparta, which is not even considering creating this type of fund. “And they are incredibly exposed to currency risk”, he adds. While revenue from U.S. treasury bonds border on zero, investing in Brazilian debt results in an income superior to 9.5% per annum.
The attractiveness of Brazilian assets is also a deterrent, affirms the investment director at Safdié Gestão de Patrimônio, Otávio Vieira, who sees no reason to move his clients’ money abroad in the near future. “Brazil's real interest fees are very high, and the stock market is a cheaper investment here than elsewhere such as India and China”. The basic Brazilian interest rate is 9.5% per year – the highest in the world – and should increase to 11.75% by December, according to the market projections published in the Brazilian Central Bank’s Focus bulletin.
The unfavorable foreign environment has caused great damage to some funds. The return of Sparta Commodities FIM, from Sparta, was minus 0.7% year-to-date on April 30. The fund, created in October 2009 and focused on individual investors, had a net equity of R$ 3.4 million at the end of April. “We are suffering with the depreciation of commodities such as coffee, corn and sugar in the Chicago and New York exchanges, the largest marketplaces on the planet for trading these products.“ Pointing to the 3% gain recorded in 2009, Nehmi is betting on the product’s potential. “With the fund, we can devise positions in markets that are more liquid than the BM&F”, he observes.