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Brazil builds reputation as hedge fund centre

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The Safdié family has a long history of involvement in Brazil’s financial services industry, including the ownership of a bank for 35 years, so it’s appropriate that the group’s Geneva-based

The Safdié family has a long history of involvement in Brazil’s financial services industry, including the ownership of a bank for 35 years, so it’s appropriate that the group’s Geneva-based private banking business should have launched the first fund of hedge funds focused solely on Latin American managers.

Now, the Safdié LatAm Fund is almost two years old and has more than USD150m in assets under management. It invests with some 14 managers, most of them based in Brazil, although Banque Safdié’s database also includes managers elsewhere in Latin America and in global hedge fund centres such as New York or London. But from wherever you sit in the world, the market in Latin America and in Brazil in particular has become a compelling case for investors.

Brazil is both the largest economy in the region and the most developed in terms of the liquidity and sophistication of its financial services industry. And unlike most other Latin American countries, it has long nurtured a vigorous hedge fund industry serving both the domestic market and offshore investors.

The industry has benefited, ironically, from economic turbulence in the past. Managers have honed their ability to generate absolute returns in times of extreme stock market volatility and currency fluctuations. Meanwhile, conventional long-only equity funds have until recently found it hard to flourish in Brazil because high interest rates made fixed-income investment more attractive.

Today, however, hedge fund managers are benefiting from the country’s extended period of political and economic stability. With increasing global demand for its agricultural commodities and mineral wealth, Brazil now enjoys balance of payments and fiscal surpluses, low and stable inflation and an improving level of public debt. This has created an environment ripe for public offerings, a longer-term yield curve and increasing liquidity in derivatives, all factors that are creating more opportunities for managers.

This in turn is helping the hedge fund industry to grow and diversify. In the past, managers in Latin America followed predominantly macro strategies, but today there is a second wave of funds using long/short equity strategies such as pair trading and equity hedge, as well as arbitrage funds and the establishment of genuine multistrategy funds with independent books for each strategy.

Hedge fund managers are supported by prime brokerage and administration services from leading global institutions including Bank of New York Mellon, UBS and Deutsche Bank as well as local banks such as Banco Itaú, and their offshore funds have access to the full range of service providers.

The Latin American hedge fund boom is being prompted in part by demand from foreign investors for access to an economically buoyant region where the correlation of assets to their other investments is low. But local institutions are also increasing their allocation to hedge funds as regulation becomes less onerous. Whereas in the past Brazilian pension funds could not invest in funds that employed leverage or intra-day trading, they can now allocate capital to funds that trade in derivatives or to funds of hedge funds, albeit within fixed limits.

The number of private clients investing in alternatives, especially funds of hedge funds, is also increasing. In the past such investors mainly followed conservative strategies, but as the economic environment improves and fixed-income returns decline, larger allocations are being made to more risky assets. The next steps will be private equity, sophisticated credit and real estate related products.

Otávio de Magalhães Coutinho Vieira is executive director of Safdié Private Banking

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