Latin America–based hedge funds aren’t the irresistible lure they were just a few months ago. Some have seen drawdowns of as much as 40 percent as commodities prices have reversed the past year’s sharp climbs. Broader risk aversion among investors who have the subprime jitters only adds to skepticism regarding a region that doesn’t exactly have a history of economic stability. But some experts say there is little risk that hedge fund firms in Latin America will suffer the fate of commodity-focused managers in the U.S. like Ospraie Management, whose once-$2.8 billion flagship Ospraie Fund fell 26.7 percent in August. That’s because Latin American hedge funds use a lot less leverage than their U.S. counterparts do.
“However, during the past few months, a significant unwinding has taken place, and many funds have lost between 30 percent and 40 percent of their assets under management,” notes Alan Haidinger, head of funds of funds at UBS Pactual Bank in Rio de Janeiro. “Many investors have been disappointed by returns this year and are returning to more traditional investments, such as cash and government bonds.
Haidinger adds that Brazilian hedge funds haven’t been helped by the fact that they were heavily invested in stocks closely tied to the country’s economy. Like the U.S., Brazil has seen its real estate values tumble in the face of the global credit crisis.
Michael Hartnett, the New York–based chief emerging-markets equity strategist at Merrill Lynch & Co., confirms Haidinger’s impressions. “During the third quarter, there has been relentless liquidation of emerging-markets equities,” he says.
According to UBS Pactual’s IFMM index, which tracks Brazilian hedge funds, year-to-date returns were 4.76 percent through early September, compared with 11.87 percent for all of 2007 and 20.04 percent in 2006. By comparison, certificates of deposit in Brazil have returned almost 8 percent percent year to date, underscoring the comparatively weak performance of hedge funds.
“The funds’ disappointing returns are starting to make investors nervous,” says New York–based Eduardo Levy-Yeyati, head of Latin American research for U.K. investment bank Barclays Capital. “During the past few years, massive flows into [emerging-market] funds took place, but investors are now in the process of unwinding, and it has not come to an end yet.”
Brazil is home to about 85 percent of all Latin American hedge funds, and hedge fund assets under management in the country total about $150 billion, according to UBS Pactual.
The gloom down south may only increase. Given the growing financial crisis, it seems unlikely that investors will return to Latin American hedge funds with much zest until the dollar stabilizes, commodities prices begin to recover and international markets become less volatile.
