Hedge Funds Betting on Bolsonaro Suffer Heavy Losses After Lula Wins Fourth Term... Up to 32%

Hedge funds that had expected rival candidates to win suffered heavy losses after Brazilian President Luiz Inacio Lula da Silva secured a fourth term in Brazil's presidential election. Some funds fell more than 30% in a single day immediately after the election.

Brazilian President Luiz Inácio Lula da Silva, who won a fourth term. Yonhap News Agency

According to Bloomberg News on October 30 (local time), hedge funds suffered a series of losses as stock, foreign exchange and interest rate markets swung sharply after President Lula won the runoff in Brazil's presidential election on October 25.

In the first round of voting on October 4, Flavio Bolsonaro, the Liberal Party candidate and eldest son of former President Jair Bolsonaro, came in first. At the time, investors expected Bolsonaro to reduce the fiscal deficit and create conditions for interest rate cuts if he took office, and increased their investments in risky assets such as stocks.

But investment losses mounted when the runoff results differed from expectations. According to Bloomberg data, Encore Asset Management's equity fund fell 32% on October 26, the day after the election. Vista Capital's Multistrategia fund dropped 24%, while the Legacy Alpha Fund and the Ace Fund posted losses of 8% and 9%, respectively.

Joao Braga, a portfolio manager at Encore Asset Management, said the firm had significantly increased its long positions in stocks. He said that, based on its analysis of opinion polls and voter preferences, it had judged Bolsonaro to have a high chance of winning.

The shock also spread across Brazil's financial markets. The Bovespa Index, the benchmark stock index, fell about 18% that week, while the real also plunged in value. Swap rates, particularly for longer-term contracts, rose by more than 2 percentage points.

Investors are concerned that the Lula administration may prioritize social spending and boosting consumption over reducing the fiscal deficit, which exceeds 9% of gross domestic product (GDP), potentially prolonging the high-interest-rate environment.

Brazil's hedge fund market saw net outflows of 9.3 billion reais (about KRW 2.3 trillion) through September this year. The market is watching for the Lula administration's plans to shore up fiscal soundness and its choice of finance minister.

This content was produced with the assistance of AI translation services.