(Adds details from letter, fund performance, comments)
By Bruno Federowski and Guillermo Parra-Bernal
SAO PAULO, Jan 6 (Reuters) - Verde Asset Management SA, which runs Brazil's largest hedge fund, sees "good chances" that the country's central bank will cut the benchmark overnight lending rate by a bigger-than-expected 75 basis points this month in a bid to revive a weak economy.
In a monthly letter to investors, money managers led by Luiz Stuhlberger said Verde stepped up holdings of fixed-rate debt on hopes of a bigger rate cut. Verde had already built a sizeable position in inflation-linked debt ahead of the recent start of the country's first rate-cut cycle in four years.
The central bank has twice cut the benchmark Selic rate by 25 basis points since October, sticking to a moderate pace even as the deepest recession in decades drags on. A Reuters poll on Friday showed that most economists expect policymakers to cut the Selic by half a percentage point on Jan. 11.
The letter underscores investor concern that Brazil's economic rout, once forecast to be over late last year, could drag on through this year and derail President Michel Temer's efforts to rebalance fiscal accounts.
"Without some improvement in economic growth, Brazil's fiscal issues have no solution," the letter said. "The rate cut will not generate growth. But it should stop constraining it."
Yields on interest rate futures <0#2DIJ:> suggest traders expect a 50 basis-point cut in this month's meeting, with a roughly one-in-four chance of a 75 basis-point cut.
Lower rates typically translate into a weaker currency by reducing the allure of local financial assets. Still, hopes that Temer will be successful in curbing debt growth fanned a 21 percent rally in the Brazilian real last year, its strongest in seven years.
São Paulo-based Verde said the real reached "levels of overvaluation not seen in years," noting that was unsustainable in the medium term.
The so-called Verde FIC FIM fund booked a consolidated return of 3.07 percent in 2016, extending gains to 15.13 percent for the year. The fund outperformed the benchmark CDI interbank interest rate's 14 percent return in the period.
Investments in CDI-linked instruments were the biggest drivers of gains last year. Verde's fixed-income book returned 3.29 percent last year, while the fund's currency and equity books were nearly flat.
At the end of last month, Verde managed about 31 billion reais ($9.6 billion) in assets.
$1 = 3.2209 reais Editing by Andrew Hay and Richard Chang