Hedge-fund legend Jakurski holds sway in market he helped launch

At 71, Harvard-educated Jakurski is seen as a godfather to Brazil's now booming hedge fund industry. Several top managers credit "the Jakurski way" with helping them lure new cash as peers abroad increasingly lose out to passive investing or quant strategies. Over a career spanning more than 45 years, he's traded for George Soros, mentored billionaire banker Andre Esteves, and partnered with future Economy Minister Paulo Guedes to found a bank now called Banco BTG Pactual. In 1998, Jakurski and Guedes started JGP Asset Management, one of Brazil's first hedge funds, at a time when fellow money managers thought, Why bother?

"When I started trading stocks, I was a one-eyed man in a country of the blind," says Jakurski, who became famous in the 1990s for a risky telecommunications shares trade that multiplied sixteenfold Pactual's proprietary capital in a year. "Back then it was almost impossible to move around in the market. There were times when it took me three months to buy and then three more months to sell. I spent most days on the phone-yelling."

In a rare interview, Jakurski sits in the conference room of JGP's headquarters in Rio de Janeiro's Humaitá neighborhood, under the auspices of the Christ the Redeemer statue. Soft-spoken and measured, he's nursing a bad cold, for which he's taking antibiotics, and waves off a photographer who starts snapping pictures while he's talking. The cameraman is, however, welcome to sit and take part in the conversation that wanders from the personal to the professional and-at times-the philosophical.

It used to be that sky-high borrowing costs in Brazil meant investors had to do very little to earn a healthy return, while hedge fund pioneers such as Jakurski had to do a hell of a lot to top them trading stocks. Brazil's benchmark Selic interest rate, which averaged about 14% in the past two decades and at one point hit 45%, now sits at a record low 4.25%.

It's no coincidence, then, that with every notch downward, more asset managers have opened shop and more money has flowed their way. Brazilian funds managed 5.4 trillion reais ($1.23 trillion) at the end of last year, an almost fivefold increase from a decade earlier, according to capital markets association Anbima. Only 28 billion reais of that sat in exchange-traded funds.

"Brazil was always a nation where you had zero-risk government bonds and guaranteed returns-no one wanted to mess with that," Jakurski says. "What we're seeing now is a revolution in how money is allocated."

Among top funds benefiting from this new environment are Constellation Investments, Verde Asset Management, and BlueLine Asset Management-each with a resident Jakurski mentee.

And while Jakurski is often overshadowed by his more famous protégés and former partners, the JGP Equity Master FIA fund returned 34.65% last year, 3.5 percentage points more than the benchmark Ibovespa stock index. With 20 billion reais in assets under management, JGP is still one of the biggest independent hedge funds in Brazil.

So what, exactly, is the Jakurski way?

Luciano Brandao, head of equity at BlueLine, breaks it down like this: consistency, leverage, and capital preservation. At BlueLine, the 220 million-real hedge fund firm founded by former JPMorgan Chase executives, Brandao says, about 30% of the firm's equity portfolio is managed with that in mind-as opposed to his usual "double alpha strategy," which targets gains through short and long positions. BlueLine's Blue Alpha Master FIM fund has returned 10.32% since its inception on May 31, 2019, compared with 3.82% for its benchmark through Feb. 12. 

Pedro Sales, portfolio manager at Verde, expands on the method: "Jakurski has a macro outlook, which is great for the medium to long term, but in the day-to-day, he often just goes on market feeling," says Sales, whose Verde Am Long Bias Master FIA fund posted a 37.66% gain in 2019. "It's not uncommon for him to make short-term bets that completely contradict his long-term view."

Over the course of the interview, as he talks, Jakurski shares some of those views and his own story, touching on everything from why he chose Harvard over Stanford ("We didn't have much money at the time, and we figured the plane ticket to Harvard was cheaper") to what it was like starting out ("Twenty years on a trading desk, and it was always infernal screaming-now it's as quiet as a tomb") to why he'd never move to São Paulo, Latin America's financial hub ("I want to stay in Rio, doing my job, having fun").

Jakurski has a special affinity for Rio de Janeiro, the city where he was born after his parents immigrated to Brazil following World War II. They met before the war, were from the Polish resistance movement and got imprisoned in two Nazi camps in Poland, he says.

He earned his bachelor's degree in mechanical engineering from Pontificia Universidade Católica, a university in Rio, and pursued an MBA at Harvard Business School. His father persuaded him to get the business degree, as he needed Jakurski to manage his public lighting firm, which installed lights for streets and soccer stadiums. When the young Jakurski returned to Brazil after finishing at Harvard, he was "in love" with finance and decided not to go to work at his father's company. He was soon recruited for a career as a banker.

Jakurski started out at Unibanco, which merged with Banco Itau in 2008 and is now Latin America's biggest bank by market value. After stints in leasing and investment and commercial banking, he was offered a big promotion: to become the bank's head of treasury and proprietary trading. But it came with a caveat: He'd have to move to São Paulo. "I said no, and that was the end of my career at Unibanco," he recalls.

In 1983 the banker Luiz Cesar Fernandes asked Jakurski and Guedes to co-found Banco Pactual, which became powerhouse BTG Pactual. Guedes and Jakurski had the same combustible chemistry as other famous business duos-a Jobs and Wozniak or a Gates and Allen-with Guedes the temperamental visionary and Jakurski the get-it-done trader.

In 1991, after a 70% stock market collapse, Jakurski made his most legendary trade: He leveraged up heavily and pooled all Pactual's proprietary capital into two telecommunications stocks. They both shot up in price, with one of them, Telebras, soaring from $2 to $32 in a year, he says, handing Pactual and clients that sixteenfold return.

Such extreme wagers, where a portfolio is concentrated in one or two investments, should be made only in "moments when all the variables are in your favor," he says. "Opportunities like that are very rare. When they do come along, you've got to go for the jugular."

In an age when central banks are pumping liquidity into the markets and one tweet from President Trump can send markets into a tailspin, such surefire windows are getting harder and harder to find, Jakurski says.

Thanks to his telecommunications trade, Pactual became a relevant player in Brazilian markets. The bank could take leading proprietary positions on carry trades that exploited the difference between international and domestic interest rates by borrowing in dollars and investing in reais, with earnings as big as 60% a year. Jakurski and Guedes' reputation grew while about 90% of Pactual's profit came from trading. The duo decided to take advantage of their fame and leave to create their own hedge fund. It was at JGP that their relationship deteriorated, leading to Guedes's departure. Guedes declined to comment for this article. Jakurski declined to discuss Guedes's leaving JGP.

A generation of famous would-be investors and bankers got their start at Pactual under Jakurski, including Esteves, who began as a computer technician in 1989, and Florian Bartunek, a former intern who's now the chief investment officer at Constellation. 

Esteves, BTG's biggest shareholder, spoke of Jakurski's ongoing influence in a panel at the bank's investor event in July: "Jakurski has been my partner for many years, my boss, and the father of the risk management DNA at the bank, [which] is a reason to be proud."

Bartunek says he still relies in part on the risk management methodology Jakurski taught him. "With Jakurski, it was never just a question of teaching the craft but also shaping personalities," he says. "He was always tough but fair. You couldn't make a mistake. He'd find the error." With a weariness that's gripped much of the active management world amid the rise in passive investing, Bartunek adds: "He's a dying breed."

Even as the industry booms in Brazil, hedge fund managers are all too aware of what's happening abroad. The U.S. recorded more fund closures than launches for a fifth year in 2019, a blow to a $3 trillion market that once minted millionaires at a heady pace. Investors yanked out almost $98 billion last year, more than twice the amount in 2018, as high fees and mediocre returns sent them searching for yield elsewhere, according to EVestment data.

The rush toward ETFs is just one of the seismic shifts that have rocked the investment world since Jakurski started. The "obsession" for passive investment, he warns, brings with it systemic risks. "The ETFs all offer immediate liquidity, but their assets that replicate indexes don't necessarily have that kind of liquidity," he says.

He marvels at other changes, too, that he says turned the market into a "casino." Quantitative easing is a topic that earns an outsize amount of scorn from Jakurski. "Only the wealthy who hold financial assets have benefited," he says. "Poor people are angry. They're saying, 'This system doesn't interest me.' "

Jakurski himself has stopped trading stocks outside Brazil and instead plans to return to his credit roots. He's keen to further develop JGP's data business for collecting information on pricing and trade volume of Brazilian corporate debt in the secondary market. The firm has already used the data to create an index.

Seven minutes into the two-hour interview, Jakurski's phone rings. "Hang on, hang on," he says.

On the other end of the line, Jakurski's son is calling from Harvard. Paulo Roberto, named after Guedes, plans to follow in his father's footsteps in other ways, as well; he's in line to take over managing the family's investments. Jakurski listens for a moment. "I told you not to short the S&P on the eve of a Fed meeting. You saw the message but didn't act, right?" he says, his even tone never changing. Another pause. "Well, you better scrap it."

The legendary fund manager, it seems, still has his mentees-even if not all of them consistently follow the Jakurski way.