One country, two hedge fund legends -- two starkly different
investment viewpoints. That is perhaps the best way to
characterize Brazil, Bridgewater Associates and Kynikos.
Brazil is Latin America's largest economy and the "B" in the
ubiquitous BRIC acronym. Ray Dalio's Bridgewater is the world's
largest hedge fund with $130 billion in assets under management.
Kynikos has risen to prominence through the short-selling acumen
of founder and President Jim Chanos.
To say the two hedge fund luminaries have differing outlooks
on Brazil is stating the obvious. Earlier this month at the Ira
Sohn Conference in London,
Chanos quipped that Brazil
"is rich in resources, but not rich."
On the other hand, recent 13F filing data indicate that Dalio
is a Brazil bull. Bridgewater initiated a position in the iShares
MSCI Brazil Index Fund (NYSE:
), the largest Brazil-specific ETF,
at an average price of $56 during the second
EWZ, which has nearly $8.8 billion in assets under management,
devotes over a quarter of its weight to various securities issued
by Petrobras (NYSE:
) and Vale (NYSE:
). The former is Brazil state-run oil firm while the latter is
the world's largest iron ore producer. Whether investors like it
or not, the weight EWZ devotes to those Petrobras and Vale issues
means a bullish bet on the ETF is bullish bet on those
That is a bet that has not paid off this year. Vale's U.S.-listed
shares have slid almost 16 percent while Petrobras has plunged
nearly 26 percent. Over the past year, both stocks are down and
over the past five years, Petrobras has lost half its value while
is up less than two percent.
Besides weak returns, the two titans of Brazil's energy and
materials sectors have something else in common. Chanos called
the stocks two of his favorite shorts. Said another way, Chanos
has overtly said he is betting Petrobras and Vale will decline.
By virtue of Bridgewater's stake in EWZ, Dalio needs those stocks
to rise in order to extract a decent profit from what is now
the hedge fund's fourth-largest position
Maybe Bridgewater is starting to see the writing on the wall
when it comes to Brazil's economic struggles this year. The hedge
fund pared its EWZ stake by almost 850,000 shares during the
third quarter to bring its position in the ETF to just over 1.15
million shares at the end of September. There is also a fair
chance Bridgewater took some losses on the liquidated shares
because EWZ did not spend much time trading above $56 in the
third quarter. In fact, the ETF closed above $56 just six times
during the quarter and those instances occurred in succession
from September 13 through September 20.
Without knowing exactly when Kynikos initiated short positions
in Petrobras and Vale, it is hard to say if the firm is in the
green. However, if the hedge fund started those positions in the
late second quarter, it should be noted both stocks are down more
than six percent since then. In the past 90 days, Vale is up 9.6
percent, but Petrobras has slid 13.4 percent.
To the naked eye, it would appear that Bridgewater has reduced
its exposure to Brazil.
However, Bridgewater may have reduced its EWZ position in the
third quarter, but it did not significantly reduce its exposure
to Brazil. That is because the hedge fund boosted its stake in
the Vanguard MSCI Emerging Markets ETF (NYSE:
) by nearly 10.5 million shares during the third quarter to take
the firm's interest in the largest emerging markets ETF to almost
49.3 million shares. The firm also added 1.6 million shares of
VWO's primary rival, the iShares MSCI Emerging Markets Index Fund
). At the end of the quarter, Bridgewater owned more than 33
million shares of EEM.
EEM and VWO both track the MSCI Emerging Markets Index, which
does not exactly skimp on its Brazil exposure. At the end of the
September, EEM had an allocation of 12.6 percent to Brazil,
according to iShares data
. At the end of October, VWO's weight to the country was 12.5
according to Vanguard data
Petrobras and Vale are top-10 holdings in both
. So although Bridgewater pared its exposure to those stocks by
parting ways with part of its EWZ position, that trimming was
somewhat muted by adding to EEM and VWO.
There is more. In what was one of the biggest ETF stories of
the year, Vanguard announced in October that it will drop MSCI
indexes on 22 of its ETFs. VWO is one of those funds. Vanguard,
the third-largest U.S. ETF sponsor, will transition VWO over to
the FTSE Emerging Markets Index next year. The difference between
the FTSE and MSCI indexes that the media and many investors have
focused on is that MSCI views South Korea as an emerging market
while FTSE does not.
Bridgewater, if it was looking to dodge Brazil, should note
that VWO's exposure to Brazil will increase when it transitions
to the FTSE index. As of the end of October, the FTSE Emerging
was home to 76 Brazilian stocks and allocated
of its weight to the country.
At 17.72 percent, only China has a larger weight than Brazil
in the FTSE index. China accounts for 18.5 percent of the MSCI
Emerging Markets Index. The China exposure is important because
the country is Brazil's biggest trading partner. It has been
weakness, perceived or real, in Chinese commodities demand that
has weighed on Vale and other Brazilian materials names this
Simply put, Bridgewater reduced its position in EWZ, but by
increasing its bets on EEM and VWO, the fund is not skirting
Brazil, nor China.
Of course, Chanos is perhaps one of the most noted China bears
For more on ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.