Hedge funds lose big after backing wrong Brazil candidate

Hedge funds that bet on the victory of right-wing candidate Flavio Bolsonaro in Brazil's presidential election suffered massive losses after left-wing candidate Luiz Inácio Lula da Silva won, according to a Bloomberg report on Friday. Some funds recorded losses exceeding 30% as markets panicked following the runoff vote. Just three weeks prior, fund managers had profited from Flavio Bolsonaro's surprise first-round lead, betting on long positions expecting fiscal deficit reduction and lower interest rates. However, Lula's victory on October 25 reversed these expectations, causing a selloff on October 26 that saw funds like Vista Capital drop 24% and Encore Asset Management plunge 32% in a single day. The market turmoil stems from concerns that Lula will be passive in addressing Brazil's fiscal deficit, potentially maintaining high interest rates and discouraging risk-taking. The Bovespa index fell about 18% this week, the real became the world's worst-performing currency, and swap rates surged over 2 percentage points. The crisis compounds pressure on Brazil's fund industry, which has seen four consecutive years of outflows.