With all eyes on Brazil in the summer of 2014, South America was buzzing with excitement over the football World Cup. However, just a few short months after the tournament ended, the underlying political and economic tensions in Brazil that ‘World Cup fever’ had somewhat masked emerged, and hedge funds focused on the region’s largest economy and hedge fund hub have since been feeling the knock-on effects. Preqin’s Hedge Fund Analyst tracks 330 funds that focus on Latin America, of which 210 focus primarily on Brazil. Brazil’s economy has struggled in the last six months with issues ranging from a fall in oil prices to the weakening of the Real compared to the US Dollar. The Petrobras corruption scandal has also sent shockwaves through Brazil. The company’s stock price fell by approximately 67% between the start of September 2014 and the end of January 2015, and the Bovespa Index itself fell by approximately 24% over the same period.
How Did Each Strategy Perform?
The effects of these events have impacted hedge funds targeting the region. Equity strategies make up 53% of Latin America-focused funds and are the most favoured strategies among hedge funds with a focus on Latin America. Preqin’s Latin America - Equity Strategies benchmark is down 12.50% over the last six months (as of February 2015), compared to Preqin’s All Equity Strategies and All Emerging Markets benchmarks, which have gained 1.26% and declined 1.50% respectively over the same six month period. Despite the drop in performance over the last six months, approximately 58% of the funds represented in Preqin’s Latin America - Equity Strategies benchmark made gains over the last 12 months, signalling that this recent rough patch is not affecting the long-term capability of these funds to produce solid returns.
Other hedge fund strategies in the region have fared better, such as macro strategies funds, which make up around 19% of all Latin America-focused funds. Macro funds have generated returns of +2.54% in the last six months, showing that in spite of other hindrances, within the Brazilian economy specifically, funds with less exposure to the stock market have not been hit as hard by its recent slump.
Impact of Brazilian Markets on Hedge Funds
Although Latin America-focused funds have, on the whole, underperformed other hedge fund benchmarks in recent months, they are keeping to the hedge fund strategy of minimizing market turbulence and producing smaller declines during bear market periods. The past six months have seen a decline of 12.50% for equity-focused funds in the region, where such a loss is comparatively favourable to the 24% decline experienced by the Brazilian stock market as a whole, providing a prime example of the ability of hedge funds to reduce losses in a market downturn. In addition, while six-month performance has been lacklustre, performance over the last year has shown this is not a long-term problem. It will be interesting to see how quickly the Brazilian market can recover after the Petrobras scandal and also how Latin America-focused hedge funds perform during this period.