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As Dalio Dances Dangerously With Brazil, Chanos Smiles


One country, two hedge fund legends -- two starkly different investment viewpoints.


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 (NYSEARCA:EWZ), the largest Brazil-specific ETF, at an average price of $56 during the second quarter.

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:PBR) and Vale (NYSE:VALE). 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 stocks.

Bad Bet That is a bet that has not paid off this year. Vale's US-listed shares have slid almost 16% while Petrobras has plunged nearly 26%. 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 2%.

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 6% since then. In the past 90 days, Vale is up 9.6%, but Petrobras has slid 13.4%.

To the naked eye, it would appear that Bridgewater has reduced its exposure to Brazil.

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No positions in stocks mentioned.

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