Fundo Verde shed 1.25 percent in February, on top of a 0.06 percent in January, which were its first back-to-back monthly declines since mid-2011, according to a letter to investors. The year-to-date 1.31 percent loss at Verde compares with a return of 1.63 percent in Brazil's benchmark CDI interbank interest rate, the letter said.

February's loss stemmed from the fund's exposure to the Brazilian currency, the real, and to fixed-income investments, the letter said. Verde, led by renowned Brazilian money manager Luis Stuhlberger, oversees more than 20 billion reais ($8.5 billion) in assets.

In the letter, Stuhlberger and his team said the real's 2.9 percent gain in February followed a central bank strategy to ease demand for foreign currency and raise borrowing costs to head off inflation, making returns in the country more attractive than in other emerging market economies.

The situation, however, may not prevail for long as investment and portfolio inflows into Brazil lose steam, the letter suggested.

So far this month, the real is down 0.1 percent.

"This juggling act between fundamentals and market timing is a classical dilemma in asset management, and I already went through this thing many times in my long career," Stuhlberger said. "We continue to believe in the thesis of a devaluation of the real."

The biggest argument behind Verde's bet against the real lies in its questioning of the sustainability of Brazil's public finances, the letter said. In the short run, however, concern about the issue eased following a pledge by President Dilma Rousseff's administration to slash 44 billion reais in spending and deliver a primary budget surplus equivalent to 1.9 percent of gross domestic product.

Rousseff's budget spending practices are undergoing close scrutiny from investors after she promised to rein in public spending to avoid a downgrade by credit ratings agency Standard & Poor's. The primary surplus is a measure of the government's ability to generate cash that will be used to pay down debt.

Shrinking primary surpluses have widened Brazil's overall budget shortfall, which includes all expenses including debt-servicing, to a three-year high of 3.28 percent of GDP. In 2012, the deficit was 2.48 percent of GDP.

Stuhlberger is the chief investment officer of Credit Suisse Hedging Griffo, the Swiss bank's asset management division in Brazil.

($1 = 2.35 Brazilian reais)

(Reporting by Guillermo Parra-Bernal; Editing by Paul Simao)

By Guillermo Parra-Bernal