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Quant Fund Bucks an Industry Reckoning, Topping Brazilian Peers

Vinícius Andrade and Felipe Marques

(Bloomberg) -- Giant Zarathustra Master is getting good at dodging bullets.

With an 11% year-to-date return, the quantitative hedge fund isn’t only bucking a brutal market downturn in Brazil, but it has also largely avoided a quant industry reckoning that’s rocked its peers.

“The fund was designed to do well whenever the market gets euphoric or in panic mode,” said Flavio Terni, a founding partner at Sao Paulo-based Giant Steps Capital, which has 2.5 billion reais ($434 million) in assets under management, including the Zarathustra fund. “When things are fine, it just moves sideways.”

There’s been plenty of turmoil in Brazil recently to fuel the fund’s gains -- from the coronavirus pandemic showing no signs of slowing to political scandals and departing ministers. The nation’s benchmark Ibovespa index is down 31% in local-currency terms this year.

Zarathustra, which uses rules-based strategies to determine what and when to trade, is Brazil’s fourth-best performer among 177 domestic hedge funds in 2020, and its 32% gain over the past 12 months has topped all but two other funds. Since the onset of the crisis, more than half of its advance is linked to bets against the real, Terni said. The local currency has tumbled 30% this year, leading global losses, as record-low interest rates trim the carry-trade appeal.

Though shorting the real is a big play in Brazil’s local fund industry, Terni said the fund’s quantitative approach gave it an edge over peers. The fund, which places almost 10,000 orders a day, uses strategies that take advantage of arbitrage opportunities and hard-to-spot correlations. It has about 50% of its risk allocated outside Brazil.

“In irrational times, it’s pretty difficult to do the math and focus on fundamentals,” Terni said. “At those moments, you want to be fast.”

Giant Steps, named after the seminal John Coltrane album, was one the first Brazilian hedge fund managers to embrace quant trading that was pioneered worldwide by Renaissance Technologies. There’s no official figure showing how prevalent the strategies are in Brazil, but they account for a small fraction of the industry’s 5.1 trillion reais in assets.

‘Thus Spoke Zarathustra’

Created in 2012, the Zarathustra fund was named after Friedrich Nietzsche’s prophet, who descends from his mountain home to preach a new philosophy. Giant Steps is planning to expand this year, while most of the domestic hedge fund industry grapples with its worst losses in decades.

The firm plans to hire 10 people by year-end, boosting headcount to 35, and also aims to start a new equity fund in coming months designed by a team that includes Henrique Fiuza, a data scientist it hired from financial technology firm Nu Pagamentos SA. Giant Steps’ 2.5 billion-real AUM is up from about 1 billion reais last year, and the firm aims to double assets by the end of 2020.

Terni doesn’t expect market turbulence to recede anytime soon.

“The Fed has been printing money, the market is rallying without knowing when the outbreak will end, the political scenario is turbulent -- it’s a muddle,” he said. “I wouldn’t want to be a discretionary fund manager right now.”

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