The Brazilian financial market is full of similar (sometimes identical) investments that are taxed differently.

As this obviously impacts profitability, managers invest a lot of time and lawyers to create “efficient tax solutions” for clients. And when the rules change, the work has to start over.

This is what is happening now with clients who had exclusive funds.

At the end of last year, these funds lost the benefit of tax deferral and started having to pay semi-annual income tax, known as “come-cotas” – which is paid by the majority of open funds.

According to Itaú Unibanco’s calculations, over the past decade, the absence of come-cotas generated an extra return of 1.1 percentage points per year for exclusive fund investors, on average.

“A good portion of the asset managers’ liabilities had this tax benefit,” said Marcelo Segalis, Itaú Unibanco’s superintendant of funds of funds to Brazil Journal.

When that was over, to try to keep the funds in-house, managers began creating structures that could offer some tax advantage.

The first idea was to migrate clients to exclusive pension funds, which are not subject to the come-cotas. But in February, noticing that the industry was looking for a “loophole,” regulators vetoed this type of fund with assets over R$5 million.

“Clients with over R$5 million who completed the process and accessed these products before the new regulation could keep them,” said private banker Pedro Prado. “Others sought different options.”

One of these options is products known as FIM-RV, multimarket funds that invest at least two-thirds of their assets in variable income – similar to equity funds, they do not incur come-cotas.

The possibility of creating FIM-RV already existed, but few managers did it because the product is complex to manage and there was little demand for it.

With the tax change, some managers started preparing to launch these funds early in the year, but some of the initial structures had issues.

“Some managers wanted to cut corners. The plan was not to have real equity risk, but to operate neutral – for example, buying and selling in an index – and have variable income in the portfolio just to justify the tax benefit,” said one manager.

“This caught the attention of the Revenue. Those who were doing this gave up.”

FIM-RV funds must have at least 67% long in stocks to have the tax benefit. The net does not matter: in other words, the funds can have the same 67% short and remain neutral.

“They can have a neutral exposure in the stock market, but need to take market risk to justify that they are truly variable income products – for example, being long in Petrobras and short in Vale,” said a manager.

According to a dozen market executives interviewed by Brazil Journal, the funds being created recently actually invest in stocks – and have a complex management that is done by few and sold to few.

“These products are more similar to international hedge funds, where the manager really takes risks to generate alpha,” said Guilherme Zaczac, head of liquid alternative investments in Brazil for UBS Global Wealth Management.

“This requires training. We went after managers capable of doing this. There are few names,” Zaczac added.

Verde has had one of these funds for about 20 years, the Verde Equity, whose assets are composed of the manager’s own capital and a few clients.

“It is a product with higher volatility, which may be interesting for some investors. It doesn’t replace the exclusive fund, but it is complementary,” said Luiz Parreiras, partner at Verde.

Sylvio Castro, director of solutions and funds of funds at Itaú Unibanco, remembers that some firms already had funds with FIM-RV strategies, but they needed small adjustments to be classified as such.

One of these firms is Vista Capital. “Vista’s funds are characterized by a long-term investment horizon and the use of stocks, both in Brazil and abroad, including as a way to express the firm’s macro view,” said João Landau, founder and CIO of the firm.

“We do not anticipate changes in our strategy with the launch of the new product.”

Other firms are creating these products, but they preferred not to be mentioned – as an executive from one of these firms said – “out of fear of attracting unwanted attention from the Revenue.”

The funds have been offered to specific clients. Perhaps because of this, or due to the current state of the stock market, the demand for these funds has increased slightly.

“We have had one of these products for about two years, launched well before the rule changes, and it almost exclusively has funds from the partners,” said Carlos Woelz, founding partner of Kapitalo.

SPX, which has had an FIM-RV since 2022 that follows a long and short stock strategy, decided to wait to gauge market demand before launching another fund with these characteristics.

The firm opted to create other products with tax advantages, away from the stock market: an incentive debenture fund, which is tax-exempt, and a logistic real estate development fund, which is also tax-exempt if the investor holds the funds until maturity in seven years.

Other firms have launched funds called “macro exempt.” They need to invest 85% of assets in infrastructure debentures – but, by regulation, they can take up to two years to reach that percentage. The remainder can be invested in other assets, maintaining tax exemption.

Another group of firms is creating offshore funds, which do not have come-cotas and whose earnings are taxed annually at 15%.

“Today there are instruments that allow replicating several investment strategies in Brazilian assets abroad, with tax advantages,” said a manager who created such a product, but also prefers not to be named.


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