SAO PAULO, March 9 (Reuters) - Verde Asset Management, Brazil's largest hedge fund with over 30 billion reais ($9.68 billion) under management, posted its highest return in five months in February as bets on a stronger U.S. dollar and faster Brazilian inflation paid off.
In a letter to investors on Monday, Verde money managers led by Luis Stuhlberger said moves in currencies, stocks and fixed-income all generated gains. The fund booked a consolidated return of 4.82 percent in February, its strongest showing since September's 6.69 percent, the letter said.
Stuhlberger reiterated his view that Brazil's currency, the real, continues to be the financial asset with "the most erroneous pricing". He said he expects the real to undergo a "significant correction" as the country's record current account and fiscal deficits persist.
The currency sank 1.1 percent to 3.098 reais against the greenback on Monday, its lowest since June 2004. It has shed about 13 percent this year.
Verde said he remains "skeptical" about values on Brazil's equity markets, saying prices are being supported by foreign inflows. Last month's Verde letter said the resistance of Brazil's benchmark Bovespa stock index to falling below 49,000 underscored the growing relevance of financial stocks, which are oligopolistic in nature and resilient in economic downturns.
The Bovespa was down 1.3 percent at 49,343.55 early on Monday.
Verde's defensive approach comes after domestic markets have underperformed for the past three years as economic policy decisions weighed on confidence in state-owned companies. Last year, Brazil's current account gap was the highest in seven decades, while the government posted the biggest annual budget deficit since at least 2002.
On a year-to-date basis, the Verde fund was up 7.18 percent, compared with a 1.75 percent return posted by Brazil's benchmark CDI interbank interest rate.
Verde said it expects the dollar to continue gaining ground against the real, the euro and the Japanese yen, although not in a "linear way". Its so-called currency book netted a 2.64 percent return last month.
The fund reported a 0.82 percent return in fixed-income investments as Stuhlberger maintained his long position in inflation-linked instruments. Twelve-month trailing inflation accelerated in February at the fastest pace in a decade.
The equities book returned 1.02 percent last month due to a strong performance on global markets. The letter said some of those gains might be overdone, and Verde took some profits at the end of February. (Editing by Peter Galloway)