Off The Wire
Major Brazil funds hit by market turmoil as scandal threatens Temer
By Bruno Federowski and Guillermo Parra-Bernal
SAO PAULO, May 19 (Reuters) - Brazilian financial markets were blindsided this week by a graft scandal threatening to topple President Michel Temer, burning local hedge funds betting on an economic recovery as many suffered their worst one-day losses in at least a decade.
Cross-asset fund Adam Macro II FIC FIM , which held a total of 2.9 billion reais in assets under management at market close on Wednesday, unwound all of its positions in Brazil, swallowing a 6 percent loss on Thursday.
"We'll wait until the dust settles before getting back to Brazil," founding partner André Salgado said. "Even if the scenario improves, it's better to miss out on the start of the rally than to remain exposed to so much uncertainty."
Salgado said many investors had found themselves over-exposed to Brazil after a rally that made its local currency and stock market among the world's best performers last year.
Traders had cheered efforts by the center-right's Temer, who replaced ousted leftist President Dilma Rousseff just nine months ago, to pass austerity measures and pro-business reforms. But doubts about the possible success of those efforts reached new heights this week.
A few major players managed to limit the damage from this week's losses, having hedged their bets in recent months.
Verde Asset Management SA, Brazil's largest hedge fund, saw its holdings shrink by just 3 percent on Thursday, according to preliminary performance data obtained from market sources.
That compares to an 8.8 percent drop for Brazil's benchmark Bovespa stock index and an 8 percent slump in the Brazilian real that day.
Media representatives for Verde declined to comment.
Verde had repeatedly warned that investors were too optimistic about Congress passing Temer's ambitious pension and labor reform agenda, calling markets "complacent" in a monthly letter on May. Markets took a beating after news reports said Temer had been caught on tape condoning bribes to silence a key witness in Brazil's biggest-ever graft probe, fueling calls for his removal from office. After the story broke late on Wednesday, Temer strongly denied any wrongdoing and said he will not resign. Brazil's currency and stocks rebounded on Friday, as some investors saw buying opportunities in the wake of a selloff, but political uncertainty still remained high.
The performance data seen by Reuters showed that 11 percent of the holdings of the Ibiuna Hedge STH FIC FIM cross-asset fund were wiped out on Thursday, the biggest daily decline since it opened in 2012.
If confirmed, that nearly erased the fund's gains this year, which had reached 12.6 percent by market close on Wednesday, when it held a total of 1.2 billion reais ($363 million) worth of assets, according to data filed with securities regulator CVM.
Representatives for Ibiuna declined to comment.
This week's losses came as Brazil's hedge fund industry was clawing its way back from a years-long slump, as a deep recession and sky-high interest rates dampened the allure of active investment strategies.
Demand for cross-asset funds spiked last year, fueled by the first interest rate-cutting cycle in four years. Contracts pegged to Brazil's benchmark CDI rate have yielded 4.4 percent so far in 2017.
($1 = 3.31 reais)
(Writing by Bruno Federowski; Editing by Tom Brown)