World Economy

Brazilian Hedge Funds Hit by Market Rout

High-risk Alaska Black lost 28.02% on Thursday.High-risk Alaska Black lost 28.02% on Thursday.

Several Brazilian hedge funds suffered their worst one-day losses in at least a decade after Brazil’s financial markets were slammed by a corruption scandal threatening to topple President Michel Temer and his reform agenda.

High-risk Alaska Black lost 28.02% on Thursday, after turning in the top performance among Brazilian hedge funds tracked by Reuters in 2016 with a 129% return.

Manager Henrique Bredda said around half of the losses in the fund, formally known as Alaska Black FIC FIA—BDR Nivel I, came from transactions involving different maturities in the yield curve.

Brazilian markets took a beating on Thursday on reports Temer had been caught on tape condoning bribes to silence a witness in the biggest graft case in Brazilian history, fueling calls for his removal from office. Temer strongly denies any wrongdoing and has said he will not resign.

Yields on interest-rate futures spiked, with all contracts hitting a daily oscillation limit. The volatility in the fund’s holdings worsened because longer-term interest rate futures have wider limits than shorter-term ones, Bredda said.

The fund returned between 8 and 9% on Friday, Bredda said, partially correcting the slump as Brazilian assets rebounded from Thursday’s plummet.

According to data from securities regulator CVM, Alaska Black held 371 million reais ($114 million) in assets under management at the market close on Wednesday.

Manager Adam Capital Gestao de Recursos Ltda unwound all of its positions in Brazil, swallowing an 18.2% loss in its high-risk Adam Advanced Master FIM CP IE vehicle and a 6% loss in lower risk Adam Macro II FIC FIM.

“We’ll wait until the dust settles before getting back to Brazil,” founding partner Andre 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, to pass austerity measures and pro-business reforms.

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% on Thursday, according CVM data. That compares to an 8.8% drop for Brazil’s benchmark Bovespa stock index and an 8% slump in the Brazilian real that day.

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