Out of about 70 selected portfolios, only 22% surpassed the investment benchmark over two and a half years; in 2022, this figure was 67%
07/24/2024
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Luis Stuhlberger — Foto: Gabriel Reis/Valor
In the “astral hell” that led to the poorest half-year performance on record for multimarket funds, the Anbima Hedge Fund Index (IHFA) edged up by a mere 0.20%. Funds that base their investment decisions on macroeconomic trends have nearly depleted the cushion they once had over the CDI (interbank short-term rate).
Out of approximately 70 portfolios monitored by Guia Valor de Fundos, only 22% outperformed the benchmark over a two-and-a-half-year period ending in June. This figure was 67% in 2022, but it dropped to 24% last year and just 6% since January, according to calculations by economist Marcelo d’Agosto, coordinator of the guide.
The roster of those who have weathered the storm of double-digit CDI rates and rapid shifts in scenarios both in Brazil and globally includes established players from the independent sector, such as Absolute, Neo, Verde, MAPFRE, Quantitas, and JGP. Newer asset management firms are also on the list, including Capstone (founded by former SPX professionals), Genoa (started by a team from Itaú), and Asa Investments, part of Alberto Safra’s group.
“The past two years have been some of the toughest for this asset class because, although they have managed to capture many themes, the majority of strategies revolve around monetary policy, and the disparity in information between interest rates and inflation has been significant,” said Luca Spinogardo, fund analyst at Arton Advisors.
He notes that the year began with renewed expectations that the U.S. Federal Reserve would begin to cut interest rates. However, these hopes did not materialize as activity and price index data came in higher than expected. “Many managers bet on this scenario and lost money; it was a significant detractor from performance,” he states.
Despite a substantial outflow of funds from mixed funds, totaling R$348 billion since 2022, the expert maintains no better tool for portfolio diversification can prove its worth over time. However, he acknowledges that the industry is undergoing a period of change. “Numerous new asset managers are encountering serious issues and are likely not sustainable. In contrast, well-established managers with billion-dollar assets and experienced teams capable of navigating these turbulent times will endure,” asserts Mr. Spinogardo.
He believes that, in the medium to long term, well-positioned asset managers will profit. “But it requires patience and correct allocation within the asset class; over-allocation starts to cause problems. If there is a reversal in results, investors will undoubtedly be disappointed.”
Additional factors have contributed to the redemption pressures. One significant element is the growth in the stock of tax-exempt bonds, which has increased by 8.2% to R$1.77 billion, according to Verde’s analysis. Changes in the taxation of exclusive and restricted closed-end funds have also played a role, including the new requirement for mandatory income tax withholding on investments and the semi-annual tax levied on fixed-income, multimarket, and foreign exchange open-end funds. With the advantage of tax deferral no longer in play, which traditionally boosted returns, wealthy families have reevaluated their investment strategies.
“It’s clear that our main challenge—not just for our asset class—is to perform better,” Luis Stuhlberger, Verde’s chief executive and investment officer, told Valor. “Last year, we didn’t do poorly; we achieved CDI plus 1.5% net, and this year, it’s key to understanding the complexities of the Brazilian tax system. I don’t mean to suggest that Brazil is at fault; far from it. We need to improve, and we are actively working on it.”
The first half of 2024 presents a typical landscape for funds with a macroeconomic focus, according to Philippe Santa Fé, interest rate manager at Asa Hedge. “The scenario shifted because the data changed, not due to a misinterpretation by managers. The cost of repricing interest rate trajectories, both domestically and internationally, significantly impacted everyone’s profitability.”
Mr. Santa Fé reflects on the unusual clarity of trends from 2022, which saw Brazilian multimarket funds perform exceptionally well. Their strategies, which were tied to international interest rates, anticipated inflationary pressures and a more stringent tightening cycle in the U.S. following the pandemic’s monetary and fiscal stimuli.
He attributes this accurate diagnosis to the experience of emerging market managers who have navigated complete economic cycles, where inflation impacts productive capacity, compelling monetary policymakers to respond.
“The return of the industry as a whole was significantly better than in the past, ours included,” remarks Mr. Santa Fe. “However, the persistent concern among shareholders is their inability to sustain this level of performance, which is largely influenced by the macroeconomic horizon. That period of visibility was an exception.” He admits that the job will not get easier, even if the U.S. Federal Reserve begins to cut rates in September, which is the baseline scenario projected by his firm.
The situation remains uncertain, especially due to the U.S. electoral process and the potential re-imposition of trade tariffs if former President Donald Trump returns to the White House, which could impact inflation. “I don’t anticipate any major directional movements while the U.S. election is underway and its outcomes are being debated. Generally, it’s a tougher environment for emerging assets,” adds Mr. Santa Fe.
Absolute’s macro funds, which underperformed the CDI from January to June, have regained some ground in July. Over their history, they have managed a cumulative return that allows some breathing room. “It’s somewhat frustrating because we accurately predicted the scenario, and it could have been better,” shares Fabiano Rios, founding partner and chief investment officer (CIO) at Asset. “The first half wasn’t great, but it wasn’t ‘horrible’ either, and it was within the normal scope of our mandate.”
According to Mr. Rios, positions in global interest rates and the stock market in Brazil resulted in losses, whereas overseas variable income and local fixed income yielded gains. He is currently favoring bank shares and mid-cap companies outside the technology sector internationally. He believes this strategic rotation will also benefit local stocks.
Looking ahead, the firm anticipates that the U.S. Federal Reserve will begin easing its monetary policy in September, expecting inflation to converge towards the target without triggering a recession. “I don’t foresee a major cycle; the cuts will be gradual, and I feel the adjustment will be midway.”
Despite Absolute’s successful fund-raising in the first half of the year, driven by its credit strategy, and over the last two years, Mr. Rios notes that a more structural commitment to multimarkets hinges on a resurgence in performance.
“If investors trust in the alpha-generating potential of these firms, they should see this as a temporary setback that will pass, as it has before,” Mr. Rios explains. “New trends will emerge, and adept multimarket funds are likely to capitalize on these opportunities. I remain optimistic about the sector. My focus is on creating value and concentrating intensely on client needs. Over time, the advantages of this approach will become increasingly apparent.” He stresses that it is crucial for investors to avoid making short-term decisions and to allow strategies to mature over time, as this is the essence of investing in multimarket funds.
President Lula’s criticisms of Roberto Campos Neto’s leadership at the Central Bank negatively impacted Neo’s share price in the second quarter, deviating from its historical performance. In response to the uncertainty, the real weakened, causing interest rates projected on the futures market to anticipate increases of up to 2 percentage points for the Selic, Brazil’s benchmark interest rate, which stands at 10.5% annually, according to Fabio Dall’Acqua, the partner in charge of investor relations at the firm. “For us, the exact point at which the cuts might stop—be it 10.5% or 10%—was less critical. What mattered most was the forecast for 12 months out, ensuring that the Central Bank wouldn’t need to raise rates again.”
The recent dip in confidence, perceived as temporary, has not prompted Neo to adopt negative positions on Brazil, according to the executive. Mr. Dall’Acqua notes that the increase in the risk premium has not been driven by rising inflation or signs of economic derailment, but rather by the uncertainty surrounding the future leadership of the Central Bank as Mr. Campos Neto prepares to step down at the end of the year.
Employing a management style that favors relative positions, multimarket funds even had exposure to long rates as a protective measure, although the stress during the second quarter impacted short rates more significantly.
Over the past two decades, Neo’s partner highlights, there have been few periods of negative returns, with the fund typically recovering quickly from downturns. The multimarket fund outperforms the CDI on 70% of trading days, and more than 90% of months conclude with positive results. In an internal analysis conducted by the firm, the executive points out that those funds that navigate stressful periods stably, without the need to liquidate positions to curtail losses, tend to recover well subsequently.
He credits the long-term consistency of the fund to the strategy of building relative value positions. This approach causes the fund to experience less impact during adverse periods but also means it does not capture gains as aggressively as more directional portfolios might. “We accumulate a bit of profit each month; it’s a characteristic of the product. This strategy is particularly effective in Brazil, where pricing inconsistencies are common.”
Assets across the board have felt the strain, from the stock market to the National Treasury Notes series B (NTN-B), and the high CDI has posed challenges for managers, states Rogério Braga, partner and multimarket fund manager at Quantitas. “Moreover, the number of managers has significantly increased over the last four years, intensifying the competition for alpha [returns above CDI] in an already competitive market.”
With U.S. interest rates at historic highs, NTN-B notes offering Brazil’s benchmark inflation index IPCA plus 6.3%, and Brazil’s economic and fiscal challenges unresolved, Mr. Braga notes, “It has become more difficult for most of the industry to outperform the CDI.” However, he adds, “There are skilled managers who, over slightly longer periods, consistently surpass the benchmark.”
This year, Quantitas Mallorca is performing close to the CDI, but historically, it has never fallen below the index in any year, the manager reports. The fund’s strategy focuses on relative value and tactical position management, which are less reliant on macroeconomic shifts. Mr. Braga explains that it is during the periods of greatest market depreciation that he typically builds positions. Currently, the fund holds 22% of its assets in the stock market, the highest proportion in the last 24 months. “As the risk premium diminishes and the outlook clarifies, we reduce our positions. Typically, you see market participants wait for clearer conditions. However, greater uncertainty carries a higher risk premium.”
*Por Adriana Cotias — São Paulo