What happened in three weeks
Brazilian hedge funds surged after Oct. 4, when Flávio Bolsonaro's stronger than expected first-round tally fueled wagers on a right-leaning government cutting budget gaps and opening the door to rate cuts. That positioned managers for lower swap rates, a rebound in domestically exposed stocks that had been hit by years of double digit borrowing costs, and a stronger real as international money came in.
Then Sunday's runoff handed Lula another term, defying most polls and prediction markets. The trade unwound fast, and Monday's scramble to exit positions hit a market where Brazilian assets were, by a wide margin, the worst performers globally this week. Legacy and Ace had said they trimmed exposure after the initial rally, but they still carried enough of the trade to take heavy hits when it reversed.
How bad the losses were
According to Bloomberg-compiled data, local macro funds dropped up to 24% on Monday. For the broader hedge fund industry, the same session was the most painful in about nine years. Vista's Multiestratégia fell 24% on Monday, Mar Absoluto dropped 15%, Legacy Alpha declined 8%, and an Ace strategy slid nearly 9% after fees.
The managers who led after the first round took some of the largest knockbacks, including Vista Capital, Legacy Capital, Ace Capital and Mar Asset Management. While a few posted small rebounds after Monday, their week to date returns were still negative through Wednesday, the latest figures cited.
An index maintained by Anbima, the capital markets association, fell about 3.9% on Monday, its worst single day since 2017. It ticked up the next day, but as of Tuesday it was ahead only 5.8% for the year, roughly half the return of the interbank rate used as a benchmark. The accompanying chart notes performance is measured from Dec. 31, 2025.
Why markets moved the way they did
The pre runoff positioning assumed Jair Bolsonaro would tackle a budget shortfall topping 9% of GDP, creating space to lower rates. Instead, investors are bracing for a Lula agenda seen as less focused on cutting that gap and more inclined to maintain social benefits and support consumption, relying heavily on higher revenue to balance the books. In plain English, that could keep interest rates higher for longer and cool risk appetite.
Prices told the story. Swap rates jumped by over two percentage points, with the longest maturities driving the move. The Ibovespa sank 18% on the week, more than wiping out the post runoff bounce earlier in the month.
Market surprises remind investors that better tools can help manage uncertainty. We're hosting our first ever investor livestream on 11/17 to show you how to use ChatGPT and Claude to invest like a pro, hosted by Briefs Finance CEO Jaspreet Singh. Save your seat.
The real weakened about 8.5%, the worst currency performance in the world over that span. As investors await signals on fiscal policy and a finance minister pick, Brazil's markets have struggled to find footing.
The stress hit an industry already losing assets as elevated rates steer money to government bonds. Across this year through September, hedge funds alone posted net withdrawals totaling 9.3 billion reais, extending a four-year streak of redemptions.
Who said what, and what managers did
Managers owned the miss. "We made money in the first round and lost in the runoff," said João Landau, founder and chief investment officer at Vista Capital in Rio. "On balance, our election expectations proved wrong," and they "cut a lot of positions."
Mar, headquartered in Rio de Janeiro, told clients in a letter, "We prepared with great rigor, planning, study and dedication for a decisive year for the firm." Then the blunt coda: "But we got it wrong. What's done is done." Legacy, based in Sao Paulo, declined to comment. Ricardo Denadai, the chief executive officer and one of the founders of Ace in Sao Paulo, said by text that the surprise result triggered sizable losses across equity, currency and rates books as moves surpassed those seen after the first round.
The four firms' swings stood out among roughly 170 actively managed Brazilian peers, each managing no less than 200 million reais in assets, with a minimum of 100 investors and at least six months of history. Taking stock of the damage, João Braga, who manages portfolios at Encore Asset Management, labeled Monday the worst session of his career spanning more than two decades. Encore's equity fund declined 32% after fees, whereas peers in the same category fell by more than 40%.
He said the fund was "heavily long" with almost no cash, based on polls, first round math and a voting analysis that all suggested a "very high probability" of a Bolsonaro win. "I obviously didn't expect anything close to the violence we saw in the market," he said. "I don't think anyone did."
What this means for your portfolio
Policy clarity is the next catalyst. The bottom line: watch Lula's fiscal messaging and the finance minister choice, because they will drive rates, risk appetite and Brazil exposure in your portfolio.
Using smarter analysis is one reliable way to seek a lasting investing edge. On 11/17, our CEO Jaspreet Singh goes live for our first ever investor livestream on how to use ChatGPT and Claude to invest like a pro. Register to join him.
