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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.

Bearded, balding and a bit paunchy, the soft-spoken Fraga may seem an unlikely hedge fund honcho. But he is one of the most powerful people in Brazil, described by some as the Alan Greenspan of Latin America. Fraga headed the central bank from 1999 to 2002, a critical time for Brazil, when decisions were made that transformed the country into today’s darling among the emerging markets. 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.

With an American mother and a Ph.D. in economics from Princeton University, Fraga is one of the most Western-minded business leaders in Brazil, and one of the best connected. He is a member of the Group of 30, a low-profile but highly influential Washington-based think tank whose members include National Economic Council director Lawrence Summers, European Central Bank president Jean-Claude Trichet and former Federal Reserve Board chairman Paul Volcker. Fraga was an important contributor to one of the group’s recent reports — Financial Reform: A Framework for Financial Stability — which provided the intellectual underpinnings for much of the Group of 20 finance ministers’ thinking on international financial markets reform. In April, Fraga assumed another important position: the nonexecutive chairmanship of BM&F Bovespa, Brazil’s principal stock market and commodities and futures exchange.

Brazil is an extraordinarily diverse country geographically,with astonishing natural resources and a population of 191 million. However, until a few years ago, Brazilians could never take their country seriously: It might be fun, but it would always be broke. A conversation about politics with Brazilian economists would usually end with their concluding ironically, “Brazil is the country of the future, and it always will be.” It was for good reason that they thought that way: Until the most recent currency, the real, was introduced in 1994, Brazil was plagued by hyperinflation, and even as recently as 2002, public debt amounted to more than 50 percent of GDP (last year the debt-to-GDP ratio was down to 40.7 percent).

Today, Brazilians take deep pride in how far their country has come during the past decade. They look down on their Argentinean neighbor, which traditionally had been seen as the more sophisticated of the two but whose economy now seems stuck in a time warp. Currently, inflation in Brazil is running at 4.4 percent a year; economists estimate that the rate in Argentina is about 15 percent. From 2004 through last year, Brazil’s average annual GDP growth was 4.45 percent. Last year it received more direct foreign investment than any other nation in Latin America: a total of $45 billion, 30 percent higher than its then-record 2007 figure.

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