Bumpy Times in Brazil, but Hedge Funds Boom

(The New York Times)— After more than a decade as an asset manager for large multinational banks, a Brazilian, Márcio Appel, wanted to make it on his own. The political and economic upheaval in his country was not going to deter him.

Even on the heels of a new scandal erupting in May that rocked the markets, the hedge fund firm he co-founded here, Adam Capital, started raising money for its newest fund. It is expected to be a $6.1 billion macro global fund, or one that invests based largely on the political and economic prospects of various countries.

If it succeeds, the firm could become one of the top independent asset managers in Latin America, based on total assets under management, and among the largest worldwide of its vintage.

Mr. Appel is going solo as Brazil’s hedge fund sector is growing even though the short-term prospects of the economy remain uncertain.

Total assets under management in June increased to $85 billion, a jump of 15 percent from the $74 billion in June 2016, according to data provided by the Brazilian Financial and Capital Markets Association, known by its Portuguese acronym Anbima.

Brazilian macro funds had a total under management of $30.79 billion (or 97 billion reais) in June, a 51 percent increase from the same month one year earlier. Just in the first six months of this year, that figure grew by 18 percent.

Such funds are more and more sought after out here. They received a net increase of $5.3 billion (or 16.7 billion reais) in the first half of this year, a turnaround from the net outflow of $412.7 million (or 1.3 billion reais) over the same period last year, according to Anbima.

Even with all that money going into hedge funds, it is still an unusual time to form a new investment vehicle here and court investors.

Brazil’s president continues to be investigated for corruption, his low popularity has eroded even further, and his ability to shepherd unpopular reform measures considered by bankers as essential to turn around the economy has diminished.

Yet Adam Capital’s founding partners, Mr. Appel and his longtime colleague André Salgado, are no strangers to crisis.

“Brazil is a very good place to make money. It always has been,” said Mr. Appel in a recent interview at the firm’s office in the upscale Leblon neighborhood near the beach.

From 2001 to 2008, Mr. Appel led asset management at the Spanish banking giant Santander’s Brazil subsidiary. Then he did that for Banco Safra from 2008 to October 2015. There he gained acclaim for his performance with their Galileo fund, which gained 199.43 percent during his tenure, according to the brokerage firm XP Investimentos.

But, he said, “I always dreamt of opening my own firm.”

The two founding partners met while at Santander — Mr. Salgado headed its brokerage house from 2003 to 2010 and later held a similar role at Safra.

Adam Capital opened its initial funds in April last year. Two weeks earlier, Brazil’s lower house had voted to move forward the impeachment process of Dilma Rousseff, then president.

Still, the firm ended up raising $2.9 billion for its flagship macro fund and accumulated a total of about $3.3 billion in under nine months. That was in part because several private banks, including Itau Unibanco and Safra, agreed to be distributors, providing access to their private banking clients.

Adam Capital “has had very strong success in raising funds,” said Michael Viriato Araujo, a professor of finance at the São Paulo-based business school Insper. “For Brazil, the speed at which they raised was impressive,” he said.

The firm’s performance has been well above benchmarks. As of July 31, the flagship fund is up 27 percent since inception. That is about 1.65 times the return of the CDI, a type of certificate of deposit common among Brazilians and considered risk-free as it is tied to local interest rates, which have long been sky-high.

The firm currently holds about $4.51 billion in assets under management, according to Mr. Salgado.

That ranks it first globally among hedge fund managers established in 2016 or later and based on total assets under management, according to the research firm Preqin.

Black and White Capital in the United States is in second place with $2.8 billion. Only two others have surpassed the $1 billion threshold in assets under management. Those are the Holocene Advisors and Sagewood in the United States.

Adam Capital so far has focused on investing in equities, mostly indexes, foreign exchange and interest rates. It has done so in the United States, Japan, and Europe as well as in emerging markets like Brazil, Turkey, South Africa and Mexico.

Until May, the firm kept about a 50/50 split between investments in Brazil and overseas, its founders said. The leak of a taped conversation between Joesley Batista, chief executive of J & F Investments, the parent of the meatpacking giant JBS, and Brazil’s president, Michel Temer, who seemed to endorse Mr. Batista’s bribery, resulted in a market panic.

Immediately afterward, Adam reduced everything related to Brazil: stocks, local interest rates and the real. Its flagship fund fell 3.52 percent that month.

Yet the firm’s funds have since rebounded, as has their exposure to Brazil, including even betting on the real over the dollar. “As of today, we’re just back to pre-Batista levels,” Mr. Salgado said. “Now it’s back to 50/50.”

They also feel like they passed an important test during that episode. “Generally I think it was bad because nobody likes to lose money,” Mr. Salgado said. “But we managed to prove to the market that our size was manageable even with an event of this proportion.”

In Brazil, several factors have buoyed independent asset managers. Interest rates falling significantly in the past year forced normally conservative Brazilian investors to start taking more risks. The emergence of new brokerage firms, some online, has also cut into the dominance banks used to have in controlling hedge funds.

Large banks are starting to sell to independent managers, said Mr. Appel. “That is what allowed us to get that big that fast,” Mr. Salgado noted.

That bodes well for other firms, too. “It’s very likely the industry will continue to grow,” said Professor Viriato, the hedge fund expert at Insper.

The minimum amount needed to invest has also fallen, making the funds more accessible.

“Hedge funds in the past were for the ultrarich in Brazil,” said Mr. Salgado. Now a hedge fund investor needs only a minimum investment of $3,175 and can make that through his bank or other firms.

Reflecting that change, Adam Capital already has about 18,000 individual investors in its funds.

Mr. Salgado said that to put money in hedge funds in Brazil today, “you don’t have to be a millionaire anymore.”

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