Hedge Fund Legacy Turns to Mexico After Profiting With Brazil

(Bloomberg) -- One of Brazil's largest and best-performing independent hedge funds is betting on the Mexican peso after correctly calling a rally in the real.

Legacy Capital, a Sao Paulo-based asset manager that has 21 billion reais ($4.3 billion) in assets, opened a long position on the peso versus the dollar, while also shorting the benchmark S&P/BMV IPC stock index, according to a Monday note to clients. The firm is betting Mexico's central bank will raise rates by more than economists forecast, improving the currency's carry appeal.

The hedge fund recently closed a similar combined position on the Brazilian real and stocks, taking profit on the currency's world-beating rally this year. As the nation's officials have now signaled the next rate hike will probably be the last, Legacy says it's time to turn to the region's second-largest economy, which has not yet shown willingness to stop tightening.

“Given its current stage in the hiking cycle, Mexico is our preference for this relative trade,” Legacy's partner Gustavo Pessoa said in an interview. The new trade “seeks to benefit from a possible investment reallocation among asset classes locally, on view that Mexican rates should reach a high level.”

Banxico, as the central bank is known, shut the door to a deceleration in the pace of rate hikes in its last rate decision, when the board unanimously decided to raise borrowing costs by 50 basis points to 6.5% acknowledging greater inflationary pressures. Pessoa expects officials to raise rates to 9% by the end of the year, above the 7.75% median forecast of economists surveyed by Bloomberg, and says there's a high probability of rates even topping his prediction.

Meanwhile, Brazil is approaching the end of its yearlong aggressive hiking cycle and other nations in the region also turned more dovish. Chile raised rates by less than most analysts expected and signaled smaller hikes ahead, while Colombia shocked markets with a lower-than-expected rate increase.

Latin America Swap Rates Drop Even in Midst of Global Bond Rout

Legacy's flagship fund posted its best month on record in March, climbing about 5% and outperforming a basket of peers by over a percentage point, due to bets on higher global rates, long-oil positions and wagers in rising inflation breakeven rates in Brazil. The firm was founded by Pessoa, Felipe Guerra, Pedro Jobim, and Jose Eduardo Araujo in 2018, after the first three left their roles at Banco Santander's Brazilian treasury desk.

The Mexican peso is up 3.6% against the dollar since the beginning of the year, largely underperforming its main peers. The Brazilian real has gained more than 21% and currencies in Colombia, Peru and Chile all strengthened more than 9%.