AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Investment fund market in Brazil: Enhanced flexibility in asset allocation overseas

By Ricardo G. Binnie

Macfarlanes LLP

Q2 2013


Introduction
This article provides an insight into key legal and practical aspects related to the enhanced flexibility in asset allocation overseas by Brazilian investment funds. It briefly scrutinises the basic features of these investment funds, covering areas such as structure and investment parameter. Finally, it highlights the new regime for Brazilian private pension funds to ultimately invest overseas.

The Brazilian regulatory framework

General overview
On 18 August 2004, the Brazilian Securities Commission (Comissão de Valores Mobiliários - “CVM”) issued Instruction No. 409, as amended (“I-CVM 409/04”), which provides for the incorporation, management and operation of most domestic investment funds designed to invest in financial assets traded in the financial and capital markets in Brazil (“Investment Funds”).

An Investment Fund assumes the legal form of a collective investment vehicle organised as a condominium (condominio), i.e., a joint-ownership of assets with no direct operations. Therefore, an Investment Fund is a sui generis form of condominium (not a corporate entity, LLC, LP or unit trust), in which two or more persons hold joint title-rights over certain financial assets, being attributed a pro rata notional fraction of all financial assets (units or interests known as “quotas”).

Investment fund structure
The structure of an Investment Fund usually involves different key players, particularly:

  • Fund Manager (Administrador de Carteiras): the fund manager of an Investment Fund is typically a local independent legal entity or natural person accredited with the CVM as administrador de carteiras. A fund manager can generally retain all of the roles to which it is authorised to perform, such as routine administration and activities of the Investment Fund, placement of the quotas, as well as control and processing of all financial assets traded by the Investment Fund. If it cannot retain all such activities due to the lack of license or authorisation, it must delegate these services to other qualified entities (e.g., banks, dealers, brokers, etc);
  • Portfolio Manager (Gestor de Carteiras): the fund manager may decide to delegate this role to another legal entity or natural person, provided that it is also accredited by the CVM (for example, in view of intragroup economies of scale). If so, the portfolio manager will be responsible for the asset allocation of the Investment Fund (including the exercise of voting rights). An agreement between the fund manager, which will remain as the Investment Fund’s administrator, and the Portfolio Manager must be executed to segregate the rights and obligations between them; and
  • Custodian/Depositary (Custodiante): this role is usually performed by few CVM authorized entities. The custodian/depositary is responsible for the custody/depositary of all Investment Fund’s financial assets.

Investment parameters
As a general rule, Investment Funds must be classified in accordance with their targeted investment policies, pursuant to I-CVM 409/04:

  • Short-Term Investment Fund (Fundo Investimento de Curto Prazo): it may invest exclusively in public debt instruments and low-risk pre-fixed securities or linked to SELIC (main public interest rate) or other interest rate;
  • Referenced Investment Fund (Fundo de Investimento Referenciado): it may have, at least, up to 80% of its portfolio in public debt instruments or low-risk fixed-income securities. It has to indicate that, at least, 95% of its portfolio follows the fluctuation of an index (indicador de desempenho);
  • Fixed Income Investment Fund (Fundo de Investimento em Renda Fixa): it may invest, at least, 80% of its portfolio in fixed-income assets linked to the fluctuation of a specific interest rate or price index;
  • Foreign Exchange Investment Fund (Fundo de Investimento Cambial): it may invest, at least, 80% of its portfolio in assets linked to the fluctuation of a specific foreign currency or exchange note;
  • Stock Investment Fund (Fundo de Investimento em Ações): it may invest, at least, 67% of its portfolio in stocks traded in the market (e.g., shares, subscription receipts, securities deposit certificates, Brazilian Depository Receipts - BDRs);
  • Sovereign Debt Investment Fund (Fundo de Investimento em Dívida Externa): it has to invest, at least, 80% in Brazilian sovereign bonds; and
  • Multimarket Investment Fund (Fundo de Investimento Multimercado): it may involve many risk factors in its portfolio, without the concentration in any specific financial asset.

With respect to the flexibility in asset allocation overseas, all Investment Funds can invest up to 10% of their portfolios in financial assets issued abroad, except for Sovereign Debt Investment Funds and Multimarket Investment Funds, which can invest up to 20% of its portfolio in those assets.

Enhanced flexibility in asset allocation overseas

Brief evolution of applicable rules
In previous public hearings supported by the CVM, the CVM has clearly expressed an interest for Investment Funds to allocate higher portions of their portfolios in financial assets traded overseas, considering this ability positive given that investors would have more exposure to different opportunities and risk factors than those in Brazil. In the CVM and market players’ opinions, the previous 10% threshold was inefficiently constraining asset allocation strategies pursued by domestic fund managers.

Within this context, in the Public Hearing No. 05, held on 4 May 2007, the CVM stated that it has chosen not to foster a sudden migration from a system in which overseas investments were almost totally restricted to a regime in which such investments are totally free. According to the CVM, this easing change should be made gradually.

FIEX 100%
Against this backdrop, the CVM introduced a new classification applicable to the existing types of Investment Funds: the so-called FIEX 100%. Pursuant to Instruction No. 465, issued by the CVM on 10 February 2008, Investment Funds are now able to invest up to 100% of their portfolios, without limitation, in securities and/or financial assets traded abroad, provided that:

  • the expression “Investment Fund Abroad” (Fundo de Investimento no Exterior) is adopted in their name; and
  • targeted investors must subscribe quotas in the minimum amount of R$ 1 million. (i.e., known as “super-qualified investors”).

The securities and/or financial assets purchased overseas by an Investment Fund must have the “same economic nature” of those assets available in Brazil and must:

• be traded on stock exchanges, future and commodities exchanges, or registration and settlement entities duly authorized/supervised by a “local recognized authority”; or
• have their existence confirmed by the foreign custodian/depository entity hired by the Investment Fund’s custodian/depository for such purpose. This foreign custodian entity must be duly authorized/supervised by a “local recognized authority”.

For purposes of I-CVM 409/04, a “local recognized authority” means an authority that (i) has entered into a mutual cooperation agreement for the exchange of information with the CVM; or (ii) is signatory to the multi-lateral memorandum of understanding with OICV/IOSCO.

In this sense, the Directive-Release No. 4, issued by the CVM on 12 September 2012, clarifies that, if the FIEX 100% invests in interests of foreign investment funds that are not traded in a regulated market duly supervised by a “local recognized authority”, the fund manager of the FIEX 100% shall use best reasonable efforts to ensure the existence of the underlying eligible assets held by the such foreign investment funds.

Getting access to private pension funds market share
Nowadays, the main trend within the investment fund industry in Brazil is the considerable and sound growth of institutional investors’ investments, particularly by private pension funds. According to the Brazilian Private Pension Association (Associação Brasileira de Entidades Fechadas de Previdência Complementar), private pension funds have approximately R$ 600 billion of assets under management.
The increased institutional investor participation is mainly due to a new regime introduced by the National Monetary Council (Conselho Monetário Nacional - “CMN”). The CMN issued Resolution No. 3,792 on 24 September 2009, as amended (“Resolution 3,792/09”), which sets out revised rules for private pension funds in Brazil regarding investment restrictions and composition of portfolios.

Among other developments, Resolution 3,792/09 sets forth that private pension funds are now allowed to invest up to 10% of their net worth in assets classified as “foreign investments”, which comprehend:

  • financial assets issued abroad which belong to portfolios of Investment Funds incorporated in Brazil;
  • quotas of investment funds and quotas of fund-of-funds, classified as “Sovereign Debt”;
  • quotas of foreign index investment funds negotiated in the Brazilian stock exchange market;
  • Brazilian Depository Receipts - BDRs; and 
  • shares issued by companies which have their headquarters within the Common Southern Market area (Mercado Comum do Sul - “MERCOSUL”).

As a result of this new regime, private pension funds in Brazil are now able to, for example, directly invest in FIEX 100% for purposes of ultimately investing overseas.

Conclusion
Brazilian public authorities have gradually increased the ability for Investment Funds and private pension funds to allocate (directly or indirectly) higher portions of their portfolios in financial assets traded overseas.

Within this panorama, domestic and international players have designed different investment structures and strategies (mainly through Multimarket-FIEX 100%, which allows the greatest flexible asset allocation) so as to offer access and exposure to financial assets traded overseas.

 


Ricardo G. Binnie is an associate in the Banking, Finance & Corporate areas of Pinheiro Neto Advogados, São Paulo branch. He is currently on secondment to the Investment Fund & Derivatives area of Macfarlanes LLP. The views expressed in this article are those of the author and do not represent the official views of Pinheiro Neto Advogados or Macfarlanes LLP. This article has been prepared for information purposes only and should not be viewed as advice.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commission
      12. Corporate Governance
      13. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      9. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
        5. Securities Settlement
      10. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Useful Websites
    11. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites