(Bloomberg) -- Investors yanked money out Brazilian hedge funds at a record pace in 2024 as rising interest rates and a crumbling of local markets fueled a second year of underperformance for the struggling industry.
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The stampede — almost 357 billion reais ($57.3 billion,) more than the past two years combined and the worst-ever in data going back to 2002 — comes as investors flock back to fixed income. Policymakers delivered three rate hikes in 2024 and pledged at least two more increases by March, which will take borrowing costs to 14.25%. That’s made it harder for hedge funds to beat returns of plain-vanilla instruments.
The central bank is tightening to try to contain a deterioration in inflation expectations as traders grow worried about Brazil’s swelling budget deficit. The concerns, which kicked into high gear in November, fueled a surge in swap rates in 2024 and sent the currency tumbling 21% against the dollar, the worst showing in emerging markets.
“There was a lot of volatility in currency, rates and equities, making it harder for portfolio managers to generate returns,” Cristiano Cury, a coordinator at capital markets association Anbima, said in an interview. “It’s been hard for them to deliver results, it’s a hard cycle.”
A basket of hedge funds tracked by Anbima’s IHFA index rose 5.8% last year, compared with a 10.9% gain for the CDI overnight rate, which serves as a reference for the industry. It was the second straight year hedge funds lagged the benchmark. Assets under management plunged to $236.3 billion, the lowest since 2021, according to Anbima.
“It was perhaps the second worst half of a year for hedge fund and equity fund industry, or the risk industry as a whole, only losing to the 2008 financial crisis,” Ricardo Eleuterio, a director at Bradesco Asset Management, one of Brazil’s largest asset managers, said in an event in November, referring to the first semester of 2024. “These are hard times.”
Wrong-way wagers on rates — both at home and abroad — weighed on performance. Vinland Capital’s bets in global fixed-income assets shaved 6 percentage points from the flagship fund’s results for the year, and positions in Brazilian rates brought numbers down by another 0.8 percentage point.