Key Takeaways
- • Brazilian hedge funds tracked by Bloomberg returned an average of 1.7% on Monday, against a 0.1% gain in the benchmark interbank deposit rate, after right-wing candidate Flávio Bolsonaro finished about two percentage points ahead of President Luiz Inácio Lula da Silva in the first round.
- • Legacy Capital Alpha gained 9.2% after fees on Monday, its strongest daily performance in eight years, while Ace Capital's fund rose 6.8%, driven mainly by call options on the iShares MSCI Brazil ETF.
- • The Ibovespa rose 7.7% on Monday, and a separate basket of Brazilian hedge funds monitored by the country's capital markets association advanced 2.1%, its strongest day in more than six years.
- • Managers are trimming options positions that gained sharply during the rally, including Ace Capital's reductions and Vista Capital's planned adjustments, while keeping exposure ahead of the 25 October runoff.
- • Heavy buying of put options and put spreads expiring before end-October indicates investors are hedging against a Lula recovery, even as Legacy's Felipe Guerra cited a 90% market-implied probability of a Bolsonaro victory.
Summary
Brazilian hedge fund managers who correctly positioned for a strong first-round showing by Flávio Bolsonaro are now adjusting their derivatives exposure after a sharp rally in local markets, according to Bloomberg. Bolsonaro finished roughly two percentage points ahead of incumbent President Luiz Inácio Lula da Silva in the first round, triggering a surge in Brazilian equities and the real, alongside a sharp fall in interest-rate swap contracts as investors priced in the prospect of lower borrowing costs. Managers are maintaining exposure ahead of the presidential runoff on 25 October.
Ace Capital, Vista Capital and Legacy Capital were among the strongest performers on Monday. Bloomberg's tracking of almost 200 hedge funds identified Vista Multiestrategia, Legacy Capital Alpha and Ace Capital as leading performers. Vista benefited from bullish positions in Brazilian equities, including call options on XP Inc. and Cosan. Ace profited from derivatives linked to the iShares MSCI Brazil exchange-traded fund, which Ace founder Fabricio Taschetto described as potentially the most asymmetric trade he had undertaken. That position was the largest contributor to Ace's 6.8% gain on Monday. Ace has since reduced its exposure but remains positioned for further appreciation in Brazilian assets. Vista's João Landau plans similar adjustments ahead of the runoff.
Legacy Capital entered the election positioned to benefit from gains across multiple asset classes. Co-founder and chief investment officer Felipe Guerra said the firm had made only marginal reductions to some positions, anticipating further gains. He said markets were assigning a 90% probability to Bolsonaro winning the presidency. Legacy Capital Alpha's 9.2% gain after fees was its strongest daily performance in eight years.
Performance across the sector was broad. Brazilian hedge funds tracked by Bloomberg returned an average of 1.7% on Monday, compared with 0.1% for the interbank deposit rate. The Ibovespa rose 7.7%. A separate basket of Brazilian hedge funds monitored by the country's capital markets association advanced 2.1%, its best daily performance in more than six years.
Investors are still guarding against a reversal. Significant purchases of put options and put spreads expiring before the end of October suggest some participants are protecting against a Lula recovery before the second round. Implied volatility has also declined, particularly for calls, indicating traders are less willing to pay for further upside. Nonetheless, Brazilian assets have continued to outperform global markets since Monday's surge. The benchmark equity index was on course for a weekly gain of 7.6%, and the currency had appreciated about 4% over the same period.
Ace Capital, Vista Capital and Legacy Capital were among the strongest performers on Monday. Bloomberg's tracking of almost 200 hedge funds identified Vista Multiestrategia, Legacy Capital Alpha and Ace Capital as leading performers. Vista benefited from bullish positions in Brazilian equities, including call options on XP Inc. and Cosan. Ace profited from derivatives linked to the iShares MSCI Brazil exchange-traded fund, which Ace founder Fabricio Taschetto described as potentially the most asymmetric trade he had undertaken. That position was the largest contributor to Ace's 6.8% gain on Monday. Ace has since reduced its exposure but remains positioned for further appreciation in Brazilian assets. Vista's João Landau plans similar adjustments ahead of the runoff.
Legacy Capital entered the election positioned to benefit from gains across multiple asset classes. Co-founder and chief investment officer Felipe Guerra said the firm had made only marginal reductions to some positions, anticipating further gains. He said markets were assigning a 90% probability to Bolsonaro winning the presidency. Legacy Capital Alpha's 9.2% gain after fees was its strongest daily performance in eight years.
Performance across the sector was broad. Brazilian hedge funds tracked by Bloomberg returned an average of 1.7% on Monday, compared with 0.1% for the interbank deposit rate. The Ibovespa rose 7.7%. A separate basket of Brazilian hedge funds monitored by the country's capital markets association advanced 2.1%, its best daily performance in more than six years.
Investors are still guarding against a reversal. Significant purchases of put options and put spreads expiring before the end of October suggest some participants are protecting against a Lula recovery before the second round. Implied volatility has also declined, particularly for calls, indicating traders are less willing to pay for further upside. Nonetheless, Brazilian assets have continued to outperform global markets since Monday's surge. The benchmark equity index was on course for a weekly gain of 7.6%, and the currency had appreciated about 4% over the same period.
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