Key Takeaways
- • Brazilian hedge funds suffered their worst single day in about nine years on October 26, 2026, after President Luiz Inacio Lula da Silva won a fourth term in the October 25 runoff, defying most polls and market expectations.
- • Vista Multiestrategia (Vista Capital) fell 24% on October 26 alone, Encore Asset Management's equity fund plunged 32% from the prior session, Mar Absoluto (Mar Asset Management) dropped 15%, Ace Capital's fund lost about 9%, and Legacy Alpha (Legacy Capital) lost 8%, according to Bloomberg as reported by Yonhap.
- • Funds had built heavily bullish positions after the October 4 first round, betting on a Bolsonaro presidency to narrow the fiscal deficit (above 9% of GDP) and enable rate cuts.
- • The Bovespa fell about 18% in the week, erasing all post-first-round gains, the real fell more than 8% against the dollar, and long-term swap rates rose more than 2 percentage points.
- • Brazil's hedge fund sector recorded net outflows of 9.3 billion reais (about KRW 2.3 trillion) through September 2026, and may post a fourth consecutive year of annual net outflows.
Summary
Brazilian hedge fund managers misread the presidential election, turning positions that had produced their biggest returns in years into heavy losses within three weeks. According to Yonhap News, citing Bloomberg, major funds suffered steep losses when selling surged at the market open on October 26, the worst single day for Brazil's fund industry as a whole in about nine years.
Following the October 4 first round, in which Senator Flavio Bolsonaro unexpectedly finished first with more votes than expected, markets rebounded sharply and some hedge funds increased bullish bets across Brazilian stocks, currencies and interest rates. Their thesis was that a Bolsonaro presidency would reduce the fiscal deficit, create room for benchmark rate cuts, lower government bond and swap rates, lift domestic equities burdened by high borrowing costs, and strengthen the real on foreign inflows. President Lula's win in the October 25 runoff reversed these trades.
Losses were concentrated in the funds that had gained most. Vista Multiestrategia, managed by Rio de Janeiro-based Vista Capital, fell 24% on October 26. Mar Absoluto, run by Mar Asset Management, dropped 15%, and Legacy Alpha, managed by Legacy Capital, lost 8%. A fund at Ace Capital lost about 9%, and Encore Asset Management's equity fund plunged 32% from the previous session. Encore portfolio manager Joao Braga acknowledged the fund was "heavily long" with almost no cash when selling hit, and said positioning was based on opinion polls, the firm's own first-round calculations and voting-pattern analysis, all of which indicated a "very high" probability of a Bolsonaro victory. Ricardo Denadai, founder of Ace Capital, said his funds lost significantly across equity, currency and rate positions because market moves exceeded those after the first round. Mar Asset Management acknowledged errors in its investment judgment in a letter to clients, stating, "We made rigorous preparations, analyses and efforts ahead of an important year for the firm, but we were wrong."
Market dislocation has been broad. The Bovespa has fallen about 18% this week, more than erasing its post-first-round gains. The Brazilian real has lost more than 8% against the U.S. dollar, the world's worst-performing currency over the period, and long-term swap rates have risen by more than 2 percentage points. A central concern is that the Lula government may prioritize social welfare spending and consumption-stimulating policies over deficit reduction, relying mainly on higher tax revenue, which could keep interest rates elevated longer than expected. The fiscal deficit exceeds 9% of GDP.
The shock compounds structural pressure on Brazil's fund industry. According to the Brazilian Fund Association, hedge funds recorded net outflows of 9.3 billion reais (about KRW 2.3 trillion) through September, making a fourth consecutive year of annual net outflows increasingly likely. XP Inc. CIO Arthur Vieira warned, "It would be surprising if the fund industry did not deteriorate further over the next year," adding, "If hedge funds fail to reinvent themselves, they will lose even more of their already weakened influence in the market."
Following the October 4 first round, in which Senator Flavio Bolsonaro unexpectedly finished first with more votes than expected, markets rebounded sharply and some hedge funds increased bullish bets across Brazilian stocks, currencies and interest rates. Their thesis was that a Bolsonaro presidency would reduce the fiscal deficit, create room for benchmark rate cuts, lower government bond and swap rates, lift domestic equities burdened by high borrowing costs, and strengthen the real on foreign inflows. President Lula's win in the October 25 runoff reversed these trades.
Losses were concentrated in the funds that had gained most. Vista Multiestrategia, managed by Rio de Janeiro-based Vista Capital, fell 24% on October 26. Mar Absoluto, run by Mar Asset Management, dropped 15%, and Legacy Alpha, managed by Legacy Capital, lost 8%. A fund at Ace Capital lost about 9%, and Encore Asset Management's equity fund plunged 32% from the previous session. Encore portfolio manager Joao Braga acknowledged the fund was "heavily long" with almost no cash when selling hit, and said positioning was based on opinion polls, the firm's own first-round calculations and voting-pattern analysis, all of which indicated a "very high" probability of a Bolsonaro victory. Ricardo Denadai, founder of Ace Capital, said his funds lost significantly across equity, currency and rate positions because market moves exceeded those after the first round. Mar Asset Management acknowledged errors in its investment judgment in a letter to clients, stating, "We made rigorous preparations, analyses and efforts ahead of an important year for the firm, but we were wrong."
Market dislocation has been broad. The Bovespa has fallen about 18% this week, more than erasing its post-first-round gains. The Brazilian real has lost more than 8% against the U.S. dollar, the world's worst-performing currency over the period, and long-term swap rates have risen by more than 2 percentage points. A central concern is that the Lula government may prioritize social welfare spending and consumption-stimulating policies over deficit reduction, relying mainly on higher tax revenue, which could keep interest rates elevated longer than expected. The fiscal deficit exceeds 9% of GDP.
The shock compounds structural pressure on Brazil's fund industry. According to the Brazilian Fund Association, hedge funds recorded net outflows of 9.3 billion reais (about KRW 2.3 trillion) through September, making a fourth consecutive year of annual net outflows increasingly likely. XP Inc. CIO Arthur Vieira warned, "It would be surprising if the fund industry did not deteriorate further over the next year," adding, "If hedge funds fail to reinvent themselves, they will lose even more of their already weakened influence in the market."
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