Brazilian hedge funds suffered catastrophic losses of up to 24% on Monday following Luiz Inácio Lula da Silva's presidential runoff victory, which defied polls and prediction markets. The rout erased gains from the first-round vote on Oct. 4, when Jair Bolsonaro's strong showing had sparked a rally. Funds including Vista Capital, Legacy Capital, Ace Capital, and Mar Asset Management were among the hardest hit. Vista's Multiestratégia fund plunged 24%, Mar Absoluto lost 15%, Legacy Alpha dropped 8%, and an Ace fund fell nearly 9%.
Managers had bet on a Bolsonaro win shrinking Brazil's massive budget deficit — exceeding 9% of GDP — enabling interest-rate cuts that would lower swap rates and boost domestic equities and the real. Lula's victory reversed that trade: markets now expect higher rates for longer, with the Ibovespa down ~18% this week, the real weakening ~8% (world's worst performer), and swap rates rising over two percentage points.
The crisis compounds years of outflows: hedge funds saw 9.3 billion reais ($1.7 billion) in net withdrawals through September, extending four straight years of redemptions. XP Inc. CIO Artur Wichmann warned the industry must reinvent or lose relevance. The local fund index dropped 3.9% Monday, its worst day since 2017, and is up just 5.8% year-to-date — half the interbank benchmark.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing