Macroeconomic Headwinds Stunt Growth of Latin America-Focused Hedge Funds – October 2015

by Robert Cullinan

  • 08 Oct 2015
  • HF

A strengthening US dollar coupled with weaker economic growth projections and increased inflation projections have led to a steady depreciation in the Brazilian real (BRL) since the start of 2015. With this in mind, Latin America-focused hedge funds have experienced performance declines in each of the four months to September 2015, yielding a YTD return of -1.82%, lagging behind the Preqin All-Strategies Hedge Fund benchmark of 1.82%.  

Looking at the cumulative performance of Latin America-focused hedge funds compared to other regions from August 2014 to August 2015, the underperformance of Latin America-focused funds over the past 12 months is apparent, breaking into positive territory in only two of the last 12 months.

Using the Custom Benchmarks tool on Preqin’s Hedge Fund Analyst database displays Brazil-focused funds posting negative returns in five of the first eight months of the year. When broken down by strategy, Preqin data asserts that Brazil-focused funds employing equity strategies are a main driver behind the sliding of the Latin American benchmark into negative territory. Of the core strategies utilized by hedge funds (credit, equity, macro and event driven), equity strategies funds, which represent 77% of Brazil-focused funds tracked on Hedge Fund Analyst, have not enjoyed the positive returns of the other core strategies over 2015. Brazil-focused equity strategy funds have, as at August, posted a 2015 YTD return of -4.24%, compared to 3.90%, 6.98% and 3.36% returned by Brazil-focused credit, macro and event driven strategies funds respectively.

Some explanation for the recent negative returns of Latin America-focused funds can be found in macroeconomic factors; the possibility of an interest rate hike in the US has increased volatility and uncertainty in global equity markets, while economic and political conditions in Brazil and other Latin American countries have added to the troubles of Latin American-focused funds. In addition to the devaluation of the BRL, Brazil’s credit rating has been downgraded to below investment value, and the country officially entered a recession in Q2 2015. Consequently, other economic factors such as consumer confidence, business confidence and retail spending are suffering, all of which negatively impact asset prices. Slumping oil prices have had adverse effects on the economies of Mexico, Venezuela and Colombia, which consistently rely on oil operations to boost their respective economies.

However, Preqin data suggests that Latin America-focused funds that do not employ equity strategies have been able to provide positive returns despite the performance hurdles outlined above. Performance figures indicate that when considering exposure to a Latin America-focused fund, credit, event driven and macro strategies funds are outperforming their equity markets-focused counterparts. Furthermore, Brazil-focused credit and macro strategies funds have posted positive returns in six of the first eight months of this year. While event driven funds have posted negative returns for the past three months, they still boast a positive YTD return of 3.36%. 

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