Arminio Fraga.: The Intellect Behind Brazil's Gávea Investimentos

Arminio Fraga.Neto awakens at his home in the hip Leblon beach area of Rio de Janeiro by 6:00 every weekday morning to go surfing — on the Web, that is. Fraga spends the first couple of hours of each day poring through online newspapers, academic papers and market research, as well as answering e-mails from portfolio managers and traders. The 52-year-old Fraga got into the habit of rising early when he lived in Short Hills, New Jersey, in the 1990s and was determined to beat the morning traffic into New York City. At the time, he was a managing director at Soros Fund Management, in charge of the fabled hedge fund firm’s emerging-markets portfolio. Today he is chairman and CIO of Gávea Investimentos, Brazil’s biggest independent investment company, with $5.1 billion in assets under management, including $1.8 billion in hedge funds.

“Every day there’s this massive amount of information from all kinds of sources: news, research, reports,” says Fraga, who is at his desk in Gávea’s modest Leblon offices by 9:00 a.m. and generally doesn’t leave before 8:00 p.m. to drive home for dinner with his wife, Lucyna, and his son, Sylvio. “I go through it all day long, connected. At the end of the day, I barely have the strength to disconnect and fall asleep.”

Few hedge fund managers are better qualified to process massive amounts of information than Fraga, who has taught economics at top universities in Brazil and the U.S. His unique curriculum vitae — he is a former governor of the Banco Central do Brasil and a distinguished scholar with hands-on experience in capital markets and an extensive career on Wall Street — has helped Fraga raise assets for Gávea since he co-founded the firm in 2003 with Luiz Fraga, his cousin, and former central bank colleague Luiz Fernando Figueiredo. Of course, it doesn’t hurt that investment returns have been good: The flagship Gávea Fund had an annualized return of 11.6 percent through July, with annualized volatility of just 8 percent, an impressive performance for a manager making macroeconomic bets on emerging markets.

大胡子，秃顶和一点潜痛，软肉体似乎可能看起来不太可能对冲基金鸿基。但他是巴西最强大的人之一，由一些拉丁美洲的艾伦格林斯潘描述。Fraga从1999年到2002年向2002年开始，这是巴西的关键时刻，当决定将该国转变为今天的新兴市场的达令时。Shortly before then-president Fernando Henrique Cardoso chose Fraga for the position, Brazil opted to end its longtime crawling-peg exchange rate regime, which loosely fixed the real to the U.S. dollar and other currencies of major trading partners, and introduced a new way to anchor the currency: inflation targeting. Fraga reinforced the new inflation policy and insisted that the government maintain a tight fiscal stance. At vital moments he raised interest rates aggressively to protect against a run on the real.

“Fraga was part of a dream team — including the finance minister Pedro Malan — that created the economic framework for the country’s current success,” says Jacob Frenkel, vice chairman of insurer American International Group, who was governor of the Bank of Israel for part of the time that Fraga led the Brazilian central bank. “They ridded the country of the virus of hyperinflation, which had been so much a part of its DNA in the past.”

Adds Jerome Booth, head of research at London-based Ashmore Investment Management, which manages about $25 billion in emerging-markets funds: “Fraga is a superstar. He put up interest rates aggressively when it was necessary and then rapidly brought them down again. He is a genius, and everyone knows that.”

The orthodox macroeconomic strategy put in place by Cardoso, Fraga and Malan formed the basis for Brazil’s current economic stability. Brazil’s neighbor Argentina adopted a much more heterodox, populist economic policy and is now dealing with the consequences. Brazil is set for an economic rebound in the third quarter of this year, whereas Argentina has stagflation, capital flight and shaky government finances.

Fraga has brought the same fiscal prudence and conservative management style to Gávea, which is headquartered in Rio de Janeiro and also has an office in São Paulo. The firm — one of the first independent hedge fund managers in Brazil to invest in all emerging markets — employs a research-intensive investment process that combines top-down macro and political research with bottom-up equity research and quantitative analysis.

Unlike his former boss George Soros, who famously favors big bets, Fraga prefers to place small wagers and make directional plays only when they are backed by a high level of conviction. Gávea’s hedge funds typically have time horizons of months, not days, and have never borrowed money to invest. (Brazil does not allow hedge funds to take on debt to finance positions.) The firm does, however, use derivatives to obtain leverage.

Since 2006, Gávea has expanded into private equity and wealth management, two areas that have grown, respectively, to $2.6 billion and $700 million in assets. Its first private equity fund — which raised $222 million at its inception in July 2006 and is now closed — has already returned 78 percent of its capital and is expected to have an annualized net return of more than 35 percent, based on the recent fair market value of its private equity investments, when it is due to finish unwinding by the first half of 2011.

Fraga says one of the things he enjoyed most about his tenure at Soros was that firm’s civilized, friendly culture, which he has attempted to duplicate at Gávea. The open plan of the offices is meant to encourage teamwork. Fraga himself is affable and gracious, although he tends to fidget in his seat, which is located near those of Gávea’s economists and traders. He says he tries to avoid second-guessing colleagues, as he wants to foster lively, open debate and ensure that people are not afraid to take risks. Fraga notes that there is enough action in the markets without the distraction of office politics. High-quality research underlies all the decisions made at Gávea, giving it the feel of a university economics department or a public policy think tank.

Today, Arminio and Luiz Fraga own 70 percent of the firm’s equity between them; 19 other partners own the rest. Of the shop’s staff of about 100, 14 are senior managers and 32 are investment professionals. Arminio says Gávea is lucky to have Amaury Bier, a former deputy finance minister of Brazil, as CEO to handle the day-to-day administration of the firm, enabling him and his cousin to concentrate on managing the funds. Arminio, who spends the vast majority of his time on the hedge fund business, is head of Gávea’s three investment committees. Luiz, the former president of Latinvest Asset Management do Brasil, oversees private equity investments (which Gávea calls its “illiquid strategies”). Marcelo Stallone, who joined the firm as a partner in April 2003 from Dynamo Administração de Recursos, an $800 million Rio de Janiero–based money manager, heads up its wealth management business.

与美国母亲和博士。在普林斯顿大学的经济学中，Fraga是巴西最具西方思想的商业领袖之一，也是最好的联系之一。他是30人的成员，这是一个低调但高度影响力的华盛顿的智商，其成员包括国家经济委员会主任劳伦斯夏天，欧洲中央银行总统吉恩 - 克劳德特里谢和前美联储董事会主席保罗·沃尔克主席。Fraga是本集团最近的报告之一的重要贡献者 - 金融改革：金融稳定框架 - 为20个财务部长思想的大部分内部金融市场改革提供了智力的基础框架。4月，Fraga承担了另一个重要地位：BM＆F Bovespa，巴西的主要股票市场和商品和期货交易所非主席。

巴西在地理位置上是一个非常多元化的国家，具有惊人的自然资源和1.91亿人口。然而，直到几年前，巴西人永远不会认真对待他们的国家：它可能很有趣，但它总是被破产。关于巴西经济学家的政治对话通常会讽刺地结束，“巴西是未来的国家，它总是会。”正是有充分的理由认为，直到最近的货币，真正的货币在1994年推出，巴西被恶性通货膨胀困扰，甚至最近的2002年，公共债券占GDP的50％以上（最后年份债务到GDP比率降至40.7％）。

如今，巴西人深深地骄傲，他们的国家在过去十年中的到来。他们瞧不起他们的阿根廷邻居，传统上被视为两人更复杂，而是现在经济似乎卡在一段时间。目前，巴西的通货膨胀每年营业为4.4％;经济学家估计阿根廷的速度约为15％。从2004年到去年，巴西的平均GDP增长率为4.45％。去年，它获得了比拉丁美洲的任何其他国家更直接的外国投资：总计450亿美元，比其纪录的2007年更高30％。

Brazil’s recent success can be partly attributed to luck. In 2001, while Fraga was at the central bank, the country was included in a report by Jim O’Neill, a Goldman, Sachs & Co. global economist, on the most promising emerging markets of the future. It was O’Neill who coined the acronym BRIC (Brazil, Russia, India and China), which has become convenient shorthand for the most important emerging markets. Brazil’s inclusion in the group has no doubt increased the country’s appeal to investors. According to the International Monetary Fund, Brazil’s total GDP was $1.57 trillion last year (making it the tenth-largest economy in the world), compared with China’s $4.4 trillion, Russia’s $1.67 trillion and India’s $1.2 trillion.

巴西的对冲基金行业已经不是发达国家rly as rapidly as the country’s overall economy. Brazilians often refer to a large funds category called multimercados as hedge funds, but that is misleading because many of the funds in that group are capital-protected or invest only in bonds. Just a few subsectors of the multimercados industry — such as long-short equity and multistrategy funds that invest in equities and use leverage — are true hedge funds. Multimercados have total assets of $160.5 billion, but analysts say that the 50 or so true hedge funds manage only $16.2 billion.

Arminio Fraga在里约热内卢的一个中产阶级家中长大。他的父亲Sylvio是该市的主要皮肤病学家之一。Sylvio遇到了Fraga的未来母亲，玛格丽特，同时在费城的寺庙大学做他的居留权。在里约热内卢，Fraga的父母将他送到一所耶稣会学校，ColégioSantoInácio，而不是任何宗教信料，而是因为它是城市最好的学校之一。

“我在前10％到20％ - 不是非常学术，”召回Fraga。“我喜欢数学和科学。”直到15岁，Fraga每天都在足球。然后他拿起高尔夫球开始，每天开始玩耍，在去年在SantoInácio的去年期间代表巴西在18岁的国家队代表巴西。他仍然玩高尔夫，虽然不是，但他说，几乎和他习惯于。

继他的中学教育之后，Fraga在着名的Pontifícia大学举行的经济学中学习了Católica·里约热内卢，继续赚取他的博士学位。在普林斯顿。为他的论文，他写了关于国际贷款和经济调整。

In 1985 he went back to Brazil to work as chief economist for Banco Garantia, a major local investment bank. There he learned how to do proprietary trading in Brazilian markets.

Fraga left in June 1988 to take a post as an assistant visiting professor at the University of Pennsylvania’s Wharton School. At the same time he was a research associate for the Cambridge, Massachusetts–based National Bureau of Economic Research, before moving back into investment banking in July 1989. For two years he was a vice president at Salomon Brothers in New York, where he did proprietary trading in emerging markets. In 1991 he returned to Brazil to work as international director at the central bank. He was made a deputy governor at the age of 33, one of the youngest ever in Brazil. Cardoso was a national senator at the time, and they had friends in common, including Pedro Malan, who had taught Fraga economics at PUC. Fraga would have occasional discussions with both men about economic policy, even after Cardoso became president in 1995.

“I used to have some phone calls with Arminio just to know myself what was going on around the world,” recalls Cardoso, who wanted to bring Fraga back into the government as early as 1993, when he was finance minister. “He was a well-informed person and goes straight to the point. I valued that.”

经过then, Fraga had returned to Wall Street to work for Soros. He was made a partner and put in charge of the emerging-markets area, which was under the overall portfolio management of then-CIO Stanley Druckenmiller.

“我很高兴地举报，在索罗斯的六年内，斯坦从来没有第二次猜到过我一次，”Fraga说。“我认为这是一个非常令人瞩目的特质，你打赌我的表现在今天在Gávea的同事时。”

经济学是弗拉格的一个伟大的激情。而at Wharton he taught a class on the capital markets of developing countries and an international finance class. During his time at Soros, he gave classes at Columbia University’s School of International and Public Affairs on capital flows, investments and economic policy in emerging markets. He has also taught economics at Brazil’s best universities, including Rio’s Fundação Getulio Vargas and his alma mater, PUC.

In January 1999, Fraga received a call at home in New Jersey from Cardoso offering him the governorship of the central bank. Based on previous conversations with Cardoso, Fraga had thought he might be tapped for the position of governor one day but was surprised by the timing. He also knew that the decision to airlift him from a hedge fund to the central bank could be controversial.

Was it ever. On February 11 economist Paul Krugman suggested in a column he wrote for online magazine Slate that in the days before the announcement of the new central bank governor’s appointment, George Soros had been trading on inside information he had received from Fraga. He accused Soros of buying up Brazilian debt, which was selling at a deep discount as “the real dropped to nearly half of its original value” on rumors that Brazil was going to default and close its banks. After news of Fraga’s appointment became public, the real recovered, “partly because Soros was now able to squeeze those who had sold Brazilian debt short,” Krugman wrote.

Fraga refuted the charges. “Paul Krugman is a great economist, perhaps the best in his generation,” Fraga wrote to Slate. “As a journalist, however, he was careless, and I happened to be his unlucky victim.”

Krugman quickly recanted, admitting that he didn’t have any direct knowledge of what had happened and apologizing for what he said was “a serious error in judgment.”

Fraga’s confirmation hearings before the Brazilian Senate that March were equally contentious. Luiz Inacio Lula da Silva, then a senator representing the leftist Workers’ Party, said that nominating Fraga to be central bank governor was “like naming a drug trafficker to head the federal police.” Fraga didn’t take the bait — “Everyone has a right to an opinion,” he said — and was easily confirmed.

“对每个人来说都很明显,尽管that Arminio had worked for Soros — maybe because of it — he was even more prepared to deal with this situation,” Cardoso says.

他立即被测试，因为在Carda的政府在Fraga预约前几周将其PEG淘汰挂钩后，真正崩溃了。新州长果断行动：他将隔夜贷款率推高出6个百分点，近45％，并宣布中央银行会尽一切努力保持通货膨胀。很快收回的货币，而Fraga则能够再次削减利率。

他于1999年3月，他任命了Luiz Fernando Figueiredo，然后是当地Banco BBA的合作伙伴，于1999年3月担任中央银行董事会，担任货币政策的副总督，他举行的帖子于2003年3月。

“Fraga和我总是顺利，”图菲斯托说。“有时我们讨论了一天建立基金管理公司的梦想。但我们不确定我们其中一人是否会先做或我们是否会一起做。“

In 2001 inflation hawks complained that Fraga was being too lenient, letting prices rise by 7.7 percent and missing the 4 percent target set by the central bank. Yet most analysts agree that Fraga performed well during a dreadfully difficult year and helped prevent Brazil from falling into recession. Argentina was in the midst of a meltdown, and many economists feared that Brazil would be next. At the start of 2002, Fraga even went to Buenos Aires to help his Argentinean counterparts navigate the economic storm their country was facing.

“阿根廷中央银行州长的州长马里奥·鲍尔斯说：”碎屑是非常慷慨的。““他是一个非常体面，温柔的人，他是促进巴西经济成功的中央数据之一。”

2002年10月，Fraga再次表现出决心，因为Lula Da Silva的经济不确定性是可能的总统胜利击球真实的。10月14日，中央银行将利率提高3个百分点，达到21％，第一次增加15个月。移动平静下来。

与右翼卡多斯政府密切相关的Fraga，卢拉达·塞尔瓦（Lula Da Silva）没有令人惊讶的意外，卢拉达·塞尔瓦在席卷办公室后没有在银行续签。Fraga记得他和图北面共享建立基金经理，以及Luiz Fraga的梦想，他们在2003年创立了Gávea。

Figueiredo was the second-most-important partner in Gávea until October 2004. Fraga at that time wanted to grow the Rio office, but Figueiredo and his family lived in São Paulo, and he was not keen on moving to the coast. The two men parted company on amicable terms, and in 2005, Figueiredo set up his own hedge fund firm, Mauá Investimentos, which today has $300 million in assets under management.

ARMINIO FRAGA LIVES JUST a quar ter mile from Gávea’s office in Leblon, an upscale residential area of Rio that has attracted some companies, especially fund managers, during the past decade. Fraga could walk to work, but he chooses to drive (he is a famous man in Brazil, and Rio is not the safest of cities). Once at the office, he visits the trading desk for the morning call with other traders and portfolio managers. Fraga likes to keep his mornings mostly free of scheduled meetings, and he spends the time reading or brainstorming with colleagues. New investment ideas pop up frequently and are discussed informally.

“When an idea gets ready, we pull the trigger,” says Fraga. “‘We’ means the most-senior three to five partners. ‘Ready’ means enough conviction is reached.”

Fraga set up Gávea at an opportune moment, and it has performed well on the back of Brazil’s economic success. His initial vehicle, the Gávea Fund, began with $205 million, which came mostly from people Fraga and his co-founders knew.

起初，他负责几乎所有的投资，但随着Gávea的贸易商和经济学家建立了经验，他已经委派了更多的决策。在这个过程中，Gávea的投资团队已经积累了很多频繁的飞行率。Gabriel Srour，高级投资组合经理和交易员，以及艾尔德华·阿布拉德奥，Gávea的首席经济师，旅行 - 经常在一起 - 每年几次到拉丁美洲，亚洲和东欧。

在第一年期间，Gávea将其投资限制在大约十几个新兴市场。今天它有能力在20个国家播放。“即使是现在我们喜欢专注于赌注，但现在我们可以同时跟进更多的故事，”Srour说明。“这是从之前的主要区别。”

经过January 2005 the flagship Gávea Fund had grown to $500 million, and Fraga launched the Gávea Brasil Fund to invest exclusively in Brazil. He also began to turn bearish, gradually moving away from equities to make macro bets on interest rates, currencies and fixed-income securities. As a result, Gávea missed the huge rally in emerging-markets stocks that started in August 2007 (the Gávea Fund was up 10 percent that year), but it also missed the crash.

“2005年，我们开始看到 - 也许是我们自己的善意，也许是泪流满面的全球问题，”召回碎片。“结果，在过去的三年里，我们已经比股票驱动更宏。”

Fraga有一个明确的宏观偏见，并喜欢对货币政策进行交易。在今年开始，他决定在匈牙利货币和债券市场进行定向。Gávea打赌，匈牙利的央行将保持高利率，并且其货币，福特，因为东欧经济体中的问题（两者发生）。

One of Fraga’s best bets during the past year actually had little to do with emerging markets. Last fall, Gávea began buying U.S. Treasury Inflation-Protected Securities. Its investment team recognized that, after Lehman Brothers Holdings filed for bankruptcy in September 2008, the markets were factoring in the possibility of deflation, which sent the price of TIPS tumbling. For Gávea buying the bonds was a no-brainer, as the U.S. Treasury limits the amount of principal that can be lost on them in case of deflation. Gávea’s bet would have come unstuck only if the U.S. government did not honor its guarantee, and Fraga thought that unlikely. In addition, the break-even inflation rate implicit in TIPS pointed to 2 percent deflation over eight years, which Gávea believed was a huge distortion. In fact, the firm believed that inflation expectations would move higher — which they did.

与许多对冲基金经理一样，Fraga必须在过去一年中处理投资者焦虑。他公司去年仅下降5.97％的公司旗舰基金，其资产从2008年7月的近13亿美元收缩至今今天约为8亿美元，因为客户在全球金融市场的活动之后被释放出来，以至于。

“Even though we didn’t crash, we did have redemptions,” allows Fraga. “We still manage plenty of money, but we had significant redemptions from a few large investors. They themselves suffered redemptions, so they had to withdraw funds. Our hedge funds are completely clean; they require only 90 days’ notice.”

困住了Gávea的投资者可能很开心。今年7月，Gávea基金占据了约13％，尽管其投资组合非常轻松地投资，其资本占现金的约60％至70％。

Fraga, for his part, remains convinced that Gávea is pursuing the right strategy — even if that means missing some of the market highs. He is cautiously optimistic that the firm’s hedge funds will attract more investors this year, especially given that interest rates in Brazil have fallen below the psychologically important 10 percent barrier for the first time and investors’ appetite for certificates of deposit should diminish.

“My view of what’s happening in the world is still one of less enthusiasm than what I see out there,” Fraga explains. “I think it’s a bit too much. The response [by governments and regulators] was massive — it had to be done, but there will be costs. The aftermath won’t be so good. I don’t think we’ll go back to the kind of growth that we saw during the bubble years, and I’m not so sure what people are thinking.”

There’s little doubt, however, about what Fraga is thinking. He seems genuinely happy managing a hedge fund. He says he may return to government when he is 60. He loves academia, as he likes to keep up-to-date with economics research and enjoys the intellectual discipline it demands. Fraga may take on another teaching post shortly. But in many ways, at Gávea he has created the next best thing to a university economics faculty: a highly research-driven fund management company with a strong macro bias.