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SAO PAULO/NEW YORK, May 5 (Reuters) - Gávea Investimentos Ltda, the hedge fund run by former Brazilian central bank President Arminio Fraga, posted higher returns in April after scrapping bets against domestic assets on optimism that a possible change of government could jump-start Latin America's largest economy.
Money managers at Rio de Janeiro-based Gávea also stepped up bets on Mexico's peso and began small purchases of Argentine assets, they said on Thursday in a monthly letter to investors.
In April, the firm's Gávea Fund returned 1.14 percent, and the higher-risk Gávea Fund Plus generated 1.66 percent, the letter said. The currency book of both funds was the main source of returns last month, followed by interest rates, the letter added.
In March, Gávea Fund lost 4.32 percent, the biggest decline since October 2008; and Gávea Fund Plus shed 6.47 percent, the second-worst monthly performance since the fund's inception in August 2013.
Brazil's perceived market risk among investors has fallen in recent weeks on expectations that President Dilma Rousseff could be removed from office by the Senate as early as next week. Rousseff was impeached by the lower house last month for breaching budgetary laws.
"After almost two years being short Brazil, we decided to open a long position," the letter said. "The perspective of a new government, the strong intervention in the foreign exchange market by the central bank and the attractive carry led us to open a long position" in the real, Brazil's currency.
Daily value at risk, a widely followed measure of the most an investor could lose in a trading session, ended last month at 1.17 percent of capital for Gávea Fund and 1.73 percent for Gávea Fund Plus.
Still, Gávea said it expects the U.S. Federal Reserve to raise interest rates sooner than most market forecasts. Wagers against countries greatly exposed to China's ongoing economic deceleration, like Singapore, also bolstered returns last month, the letter added.
Central banks around the world are adjusting their borrowing costs and taking other steps to stimulate growth, triggering massive currency market imbalances. The U.S. dollar has swung widely this year as hopes for further currency-supportive rate hikes cooled on rising volatility.
A former fund manager for billionaire George Soros, Fraga was central bank president from 1999 to 2003. After his tenure, he founded Gávea, named for an upscale Rio neighborhood with a tropical rainforest park. (Reporting by Guillermo Parra-Bernal; Editing by Richard Chang)