(FORTUNE Magazine) – What was Mario Baeza doing in January, in the middle of looming economic collapse in Brazil, telling a Brazilian fish processor, "Buy the Chilean fishing boats!"? And by the way, to send the bill to him.

Simple, really. Baeza is the CEO of TCW/Latin America, a two-year-old, $230 million private equity fund based in New York that owns a controlling interest in the fish processor, Gomes de Costa. And he figured that Gomes, Brazil's second-largest sardine producer and second-largest tuna canner, stood to benefit from the country's economic woe. After all, sardines are a cheap staple of the Brazilian diet, and exports, he reasoned, should zoom as the currency plunged. So Baeza directed Gomes to boost capacity as much as possible--hence, the boats. Even at full capacity, Gomes, which hauled in $100 million in sales last year, could fulfill only half the orders coming in from supermarkets. Says Baeza: "I'm up all night thinking about Wal-Mart and tuna fish deliveries."

Or lipstick in Argentina, or hydrochlorides in Mexico. TCW/Latin America is one of around two dozen Latin American private equity funds--run mostly for institutional investors--that have sprung up since 1996. They're designed to take controlling or minority stakes in Latin firms that will pay off generously three to five years later as the fund exits through either a strategic sale or an IPO. Before you start thinking about trying to get in on this action, consider this: The reasons Baeza and those like him are so successful--their on-the-ground knowledge of local companies and business conditions and their ability to act quickly and decisively--are the very reasons that most U.S. investors should be very careful about investing in the region, especially via mutual funds.

As local stock markets have imploded during the global economic crisis, Latin companies have increasingly been forced to seek private equity. From 1993 to 1998 the capital raised by these funds (mostly U.S.-based) rose more than a 100-fold, to $10 billion, according to the newsletter Latin Private Equity Analysts. That dwarfs the $1.5 billion held in U.S. mutual funds dedicated to Latin stocks. Predicts Susan Segal, a Latin specialist with Chase Capital Partners: "Over the next two to three years, private equity in Latin America is really going to blossom."

Nearly all the funds are run by veteran Latin America hands, but Baeza is special. Born in New Jersey to Cuban parents, Baeza, now 48, gave up a promising baseball career--the Atlanta Braves offered him a slot on its farm team--to study law at Harvard, eventually becoming a partner and top M&A specialist at Debevoise & Plimpton. In his spare time he wrote songs for pop diva Roberta Flack ("Love Came So Easy") and hung out with Dizzy Gillespie. President Clinton nominated him for the top Latin America post in the State Department in 1993 but withdrew his name after Cuban emigres in Miami accused Baeza of being soft on Castro (a charge his supporters labeled absurd). Clinton offered other posts, but instead he joined Wasserstein Perella, and after two years formed his private equity fund.

Over the years Baeza has developed ironclad rules about investing in Latin America. Never bet on a company that depends on government contracts or tax breaks: Governments often fail to deliver. Look for companies unable to exploit consolidation in their industries because of lack of capital--then provide it. And always account for economic trouble. Last year Baeza factored a 30% currency devaluation into his 1999 Brazil targets. (Good call.)

But even following these rules, can Baeza--or any of these funds--deliver in volatile Latin America? Most pledge a 30% to 35% annual return starting three to five years out from the initial investment; Baeza has promised his investors--which include the New York State Common Retirement Fund and the government of Kuwait--an aggressive 40%. As a class, the funds are too young to judge. However, here's one yardstick: In 1998, Dallas-based Hicks Muse Tate & Furst turned around a group of Argentine cable operators and produced an amazing 127% return in one year. Now that's a vision to keep Baeza awake at night.

--Edward Robinson