Citrone's Discovery Capital Management Smacked By Brazilian Swoon

May 26 2017 | 7:33pm ET

The severe volatility in Brazilian assets as well as the hiccup in U.S. equity prices last week has reportedly hammered the flagship fund at Robert Citrone’s Discovery Capital Management.

The firm's macro fund fell approximately 6% through the first three weeks of May, according to a Bloomberg article citing unidentified individuals familiar with the matter. The steep decline brings year-to-date losses to around 12%, the article added, following a gain of around 11% in 2016.

Although emerging markets have been on a tear since late last year, a political scandal involving President Michel Terner accelerated last week when recordings emerged that implicate him in attempts to buy the silence of imprisoned former legislator Eduardo Cunha. Brazil’s Bovespa index lost 18% on May 18 alone as news of the tape crossed the wires. 

While some alternative asset managers are calling the swoon an extraordinary opportunity, others believe the expanding scandal threatens Temer’s pension and labor reforms and could mean the country’s financial markets have further to fall. The iShares MSCI Brazil Capped ETF ranks among the second most-shorted ETF in the U.S. by dollar value of short interest, according to Reuters. 

While the scandal lessens Discovery’s faith in its Brazil thesis and the fund has lightened up on related equity and currency positions, Citrone reportedly told investors that continued declines in Brazilian inflation will lead to interest rate cuts, the Bloomberg article continued. 

A so-called Tiger cub due to his association with Julian Robertson’s Tiger Management, where he was head of global emerging market investments, Citrone founded Discovery in 1999. The firm manages approximately $7 billion.

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