Verde Asset Management, Brazil’s largest hedge fund, reinforced larger-than-benchmark bets on a weaker real, rising global equities and higher domestic borrowing costs, underscoring expectations that local asset prices will keep trending down in dollar terms.
In a monthly letter to investors on Wednesday, money managers led by Luis Stuhlberger said Verde is long-positioned in U.S. dollars and global equities by 40 percent and 20 percent, respectively, with no net allocation to local shares. The fund is also long positioned in Brazilian debt linked to inflation-adjusted interest rates.
Global investors are “overly optimistic” about Brazil’s outlook by assuming that domestic asset prices, as measured in U.S. dollars, are cheap and that a year-long decline in the Brazilian real is coming to an end.
Those same investors are too confident on Finance Minister Joaquim Levy’s ability to fix growing imbalances in the economy and revive growth, the letter said.
“We see the foreign investor with a permanent wish of ‘catching a falling knife,’ but the adjustment in the currency is far from over and asset prices have not adjusted to lower returns that lie out ahead,” the letter said.
The real touched the lowest level in about three months on Wednesday, shedding 1.2 percent to 3.2248 reais to the dollar. The benchmark Bovespa stock index fell 0.3 percent, while the 18-month interest rate future contract is trading around level not seen since 2009.
Sao Paulo-based Verde posted a consolidated return of -0.15 percent in June, the second negative return in three months. Verde, which has been closed for fundraising for years, recorded an accumulated 14.83 percent return this year, compared with 5.92 percent for the benchmark CDI interbank lending rate.
A disappointing – 0.96 percent return in the currency book drove consolidated returns downward in June, the letter said. Fixed income investments yielded 0.38 percent return last month, with the equities book shedding 0.77 percent.
Verde oversees about 30 billion reais ($9.3 billion) in assets.