Opinion – From Grain to Grain: Find out what they do and how multimarket funds emerged

Brazilian multimarket funds are companies that operate similarly to the well-known Hedge Funds (protection funds) international, but with a more regulated and conservative profile. This name, hedge Funds was coined by American journalist Carol J. Loomis in 1966. The flexible way in which multimarket funds operate makes investors curious about what they do.

Due to the diversity of strategies and innovations that the financial industry uses in the management of hedge fundsit is almost impossible to establish a standard that can simply define this investment vehicle.

A good definition of hedge funds is given by the authors Ineichen and Silberstein. They define them as “an investment company in which managers seek returns by exploring investment opportunities while protecting principal from potential financial losses.” Hence the name of protection fund or hedge funds.

In the Brazilian case, multimarket funds do not have all the freedom of their international peers, as they are more regulated and supervised, in this case by the CVM (Securities Commission). Therefore, despite having a wide spectrum of possible strategies, they can be defined as:

Condominiums of investors who, through operations in the various classes of assets (fixed income, variable income, currencies, commodities, etc.) in the local and international market, carry out investment strategies bought or sold, with or without leverage, aiming, in for the most part, overcome benchmarkwhich is usually the CDI (Interbank Deposit Certificate).

How did hedge funds start in the world and in Brazil?

Who first used the name hedge fund was Carol J. Loomis in the article entitled “The Jones Nobody Keeps Up With”, published in Fortune magazine in April 1966. Loomis described the performance and strategy of the Alfred Winslow Jones fund as one of the best on Wall Street.

Loomis describes Jones’s strategy as being able to make money on both rising and falling stocks. This strategy would be achieved due to the way in which the fund is managed, which would be hedged (protected in English), that is, for part of his portfolio bought in stocks, which could even have been leveraged, he sold stocks short to protect himself from stock declines. So the name hedge fund was born from the term hedgedas it was assigned to a fund that adopted such a protection strategy.

The strategy that Jones used was similar to what today Anbima (Brazilian Association of Financial and Capital Market Entities) classifies as Long and Short Directional.

Jones, who earned his PhD in sociology from Columbia University, worked as a writer for Fortune magazine.

It was his interest in technical analysis that prompted him to write the book “Fashions in Forecasting” on stock market forecasting.

Then he got together with four friends and created in 1949 his first fund. Since then, management of the funds has been passed down through generations of the Jones family, and the operation started in 1949 with US$100,000 has been expanded and diversified into other investments.

Although most authors attribute to Jones the pioneering role in this industry, Lhabitant (2007) and Dennistoun (2004) identify Karl Karsten, author of the book “Scientific Forecasting” in 1931, as the first manager of hedge funds. Karsten, along with other friends, would have created a fund at the end of 1930, that is, almost 20 years before Jones.

Karsten’s strategy was similar to that later followed by Jones, that is, he bought shares in sectors of the economy that he believed to be promising and sold shares in sectors with negative prospects. Speaking it seems even simple.

However, according to Lhabitant, Karsten did not continue to manage his fund, but used it only as an empirical test of his operating model in the stock market to publish in his book.

In Brazil, it is possible to consider the creation of the now extinct commodity funds as the beginning of the multimarket fund industry. They were created in the early 1990s.

More precisely, on 06/24/1992, the Central Bank, through Resolution 1912, regulated the constitution of commodity. The creation of these funds was encouraged with the aim of stimulating the commodity futures market.

The great advantage of these funds was the tax benefit given to them. As they are taxed at a rate equivalent to variable income funds, they have an advantage over fixed income funds, which are taxed at a higher tax rate.

Despite operating in the futures and options markets, these commodityin fact, were nothing more than fixed income funds, as they only carried out operations in the derivatives markets that synthesized the profitability of fixed income at the time and kept their cash invested in fixed income securities.

In this way, the tax advantage, combined with daily liquidity after thirty days, provided these funds with great success in raising funds, which, according to (Júnior, 2003), reached around 30% of the market share of the fund industry in a year of its creation.

However, funds from commodities they had a short life of just three years. On 12/29/1995, with Resolution 2,183 of 07/21/1995 of the National Monetary Council, these funds were extinguished and the Financial Investment Funds (FIFs) were created.

In the second half of the 1990s, these FIFs, operating in the derivatives markets, formed the embryo of multimarket futures funds, and were known as derivatives funds. These funds were nothing more than fixed income funds with limitations on operations in the derivatives markets, pursuant to Circular 2,798 of the Central Bank of 12/23/1997.

Multimarket funds, as we know them today, began to take shape in 2000 with greater flexibility in the fund industry through Circular 2958 of 01/06/2000, when the Central Bank authorized FIFs to invest up to 49% of the value of equity portfolios.

Multimarket funds currently represent 21% of Brazilian investment funds with BRL 1.6 trillion in assets under management, according to data from Anbima for February 2023.

In the next chapter, we will discuss the criteria for selecting these funds.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction

Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan

Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence

Chapter 8 Before making any investment, define these two factors
Fixed Income

Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
Chapter 13 This is the simplest way to plan your financial independence with fixed income
Chapter 14 With our interest rates, find out if it pays to invest in dollars
Variable income

Chapter 15 Taking a risk can accelerate your journey to financial independence
Chapter 16 Find out what they do and how multimarket funds emerged
Chapter 17 How to choose a hedge fund?
Chapter 18 Real Estate Investment Funds
Chapter 19 Actions
Chapter 20 Alternative Investments
Investment funds and Private Pension