UPDATE 4-JPMorgan buys majority stake in Brazil's Gavea

* Purchase made through JPMorgan's Highbridge Capital

* Gavea founded by former Brazil central bank president

* Fraga, other Gavea executives, to remain at firm (Adds hedge fund comments in paragraphs 6-7)

By Elzio Barreto and Elinor Comlay

SAO PAULO/NEW YORK, Oct 27 (Reuters) - JPMorgan Chase & Co (JPM.N) said on Wednesday it acquired a majority stake in Brazilian hedge fund and private equity firm Gavea Investimentos, joining a wave of foreign financial firms betting on one of the world's fastest-growing economies.

The New York-based bank, which made the purchase through its hedge fund Highbridge Capital Management, did not disclose details of the transaction. But Brazilian media said it would pay about $270 million for a 55 percent stake and an option to buy the remaining 45 percent in the next five years.

Gavea is a mid-sized fund firm that is co-owned by former Brazilian central bank chief Arminio Fraga, one of the best-known names in the country's bustling financial world.

Highbridge's move follows other large international players such as Brevan Howard, Europe's largest hedge fund firm, and Britain's Man Group (EMG.L), which have launched Brazil-focused funds or started operating in the country.

"On the one side companies are looking at the economic growth in the country, the rising wealth for many Brazilians," said Jorge Rodrigues, Latin America regional manager for Man Investments, the asset management division of Man Group. Man manages about $63 billion of assets.

"There is also an opportunity to offer a series of local products to its international clients and gaining Brazilian clients for its global products," he added.

In a memo sent to employees late on Tuesday by asset management chief Mary Erdoes, JPMorgan said Gavea manages $6 billion in assets. Highbridge manages about $21 billion.

"Gavea will provide Highbridge with greater macroeconomic insight and direct exposure to investing in Brazil, which will be a powerful addition to our investment capabilities," Highbridge Chief Executive Glenn Dubin said in a statement.

Under the terms of the deal, which was widely reported in Brazilian media in recent days, Fraga and six other Gavea executives will remain at the firm.

Both Fraga and his cousin Luiz Fraga, Gavea's co-founder and co-chief investment officer of the private equity business, will also join Highbridge's executive committee.

Fraga is also a member of JPMorgan's international board. [ID:nN25105540]

A golf fanatic who earned his PhD from Princeton and worked with Stanley Druckenmiller while both managed funds for George Soros in the 1990s, Fraga took the helm of Brazil's central bank in 1999 shortly after the country devalued its currency.

As soon as he took charge of the bank, Fraga boldly brought Brazil's benchmark interest rate to 45 percent to prevent a massive devaluation of the real.

Fraga, 53, co-founded Gavea in 2003, bringing with him former central bank official Luis Fernando Figueiredo and former deputy finance minister Amaury Bier.

Gavea, based in the upscale Rio de Janeiro neighborhood Leblon, became well known for its private equity investments, buying stakes in failed airline BRA, McDonald's franchises in Latin America, a chain of drugstores, shopping mall owner Aliansce and coffee producer Ipanema Coffees.

Brazil's economy, the largest in Latin America, is forecast to grow 7.5 percent this year, making it a focus for major private equity and asset management companies looking to benefit from investment flows to stocks and companies.

"It makes sense to buy someone with an established presence in the market," said Andre Querne, a partner at hedge fund Rio Gestao de Recursos, which has 150 million reais under management ($87.7 million).

"There are many opportunities for hedge funds to grow here, not only in stocks, whose performance are very much linked with the country's growth, but also in the interest rate markets with all its peculiarities."

Brazil's benchmark interest rate, at 10.75 percent, is among the highest in the world, making the country a magnet for foreign portfolio investors seeking high returns.

SHIFTING BUSINESSES

JPMorgan, like other U.S. banks, has had to reshuffle some of its trading businesses as a result of U.S. regulation passed in the summer.

JPMorgan in September said it was shifting about 45 traders from its investment bank -- where they traded for the bank's own account -- to its asset management business. [ID:nN2799932]

That was because the so-called Volcker rule barred banks from trading for their own account. That rule also curbs the size of bank's investments in private equity and hedge funds.

But JPMorgan is well below those limits, even with the acquisition of Gavea, because its hedge fund business is predominately driven by customer investments.

From time to time, the bank may inject small amounts of seed capital into funds, but it is 'de minimis' as far as the capital rules go and the bank may remove the investment once the fund is up and running with customer assets, explained spokeswoman Mary Sedarat.

JPMorgan shares were up 0.35 percent at $37.33 in late afternoon trading on the New York Stock Exchange. (Additional reporting by Douwe Miedema in London, Editing by Todd Benson, Derek Caney, Dave Zimmerman)