Early Brazil hedging taking toll on Credit Suisse's Verde fund

martes 11 de noviembre de 2014 11:55 GYT
 

By Guillermo Parra-Bernal

SAO PAULO Nov 11 (Reuters) - Extreme foreign investor complacency about Brazil's growing macroeconomic imbalances is driving up the cost of hedging for Credit Suisse's CSHG Verde FIC FIM, leaving Brazil's largest hedge fund on track to post its worst annual performance since 2008.

In an investor letter obtained by Reuters on Tuesday, money managers at Verde said Brazil's situation is "way more fragile than what market prices suggest." They spent the entire year buying insurance to protect against asset price declines as Latin America's largest economy deteriorated, the letter said.

Over the past two years, Brazil's nominal budget and current account deficits have swelled, reaching levels not seen in over a decade, as the economy slowed, inflation gathered pace and confidence slumped.

For most of the year, Verde amassed hefty losses as market volatility in Brazil soared ahead of the most competitive presidential election in 25 years. Verde had a 0.64 percent loss last month, driving consolidated returns to 2.12 percent in the first 10 months - the lowest year-to-date return in six years.

While managers accurately predicted the election outcome, "the purchase of 'insurance' might have been made too much in advance," the letter said, adding that hedging-related costs will keep taking a toll on the value of the fund.

"The reasons why our hedges have not been triggered are the following: the global outlook and the extreme complacency of investors, especially foreigners, with Brazil," the letter said.

In prior letters, managers at Verde, which was founded by star fund manager Luis Stuhlberger in 1997, have questioned the sustainability of Brazil's public finances and the central bank's strategy to prop up the real through the sale of currency swaps.

Still, fixed-income investments in Brazil pay the highest returns in any major emerging market economy, with zero-risk government debt yielding at least 12 percent annually. In contrast, rates in some developed nations remain close to zero.

Verde's domestic equities portfolio shed 0.35 percent in October, currency positions lost 0.69 percent and fixed-income investments fell 0.38 percent, the letter showed.

The Verde investor letter is widely followed by investors in Brazil, partly because of Stuhlberger's astounding track record: under his tenure, CSHG Verde FIC FIM has posted total returns of almost 8,800 percent. (Editing by Matthew Lewis)