AIMA Sees “Encouraging” Signs for Hedge Funds

The latest AIMA Hedge Fund Confidence Index (HFCI) indicates “encouraging” prospects for the industry, the association says.

The Index, which measures the level of confidence hedge funds have in the economic prospects of their business over the next 12 months, is created by AIMA, Simmons & Simmons and Seward & Kissel. It is calculated during the final two weeks of each quarter and published at the start of the subsequent quarter.Selecting the appropriate level of confidence, respondents are asked to choose from a range of -50 to +50, where +50 indicates the highest possible level of economic confidence for the firm over the next 12 months.

When considering how best to measure their level of economic confidence, hedge fund respondents are asked to consider the following factors: their firm’s ability to raise capital, their firm’s ability to generate revenue and manage costs, and the overall performance of their fund(s). The more than 300 respondents represent an estimated $1.6 trillion in AUM.

The average measure of confidence (in the economic prospects of their business over the coming 12 months) is +20.41, just under one point higher than the average measure reported in Q2. Almost all (99%) of all hedge funds that participated in the index are confident in the economic prospects of their business over the coming 12 months.

Looking at the funds’ confidence levels based on size, the index creators split the population of responses into funds that manage greater than $1 billion in assets, these account for 69% of the total number of responses; and funds that manage US$1 billion or less. AIMA says this is a notable change compared to previous quarterly reports where the split has been closer to 50/50.

Confidence among managers globally continues to climb for the third successive quarter with notable increases from non-North American managers. On a regional basis, three out of the four regions posted higher confidence levels than in Q2, the exception being North America where confidence numbers on average fell by approximately two points to +20.4. “There have been new challenges that have arisen from COVID variants and the political climate in the US and thus it’s slightly unsurprising that North America based managers are less optimistic about the next twelve months than they were last quarter, however, NA managers are overall still optimistic,” says Steve Nadel of Seward & Kissel.

By comparison, UK based hedge funds report the highest confidence rating versus their regional peers. Confidence levels are underpinned by larger UK based hedge funds who scored the highest on confidence (+22.3) than any other region. “The marked increase in confidence over the last year amongst UK hedge fund managers is great to see – and is reflected in the work we have been doing for our UK headquartered clients,” says Simmons & Simmons’ Devarshi Saksena. “Our established clients have been very active creating new products across the full range of strategies and the new start-up manager market continues to see strong levels of activity and growth.”

Confidence levels among APAC based hedge funds continue to be encouraging, AIMA says, with the region marking its third consecutive increase with funds in the region scoring +19.5.

After a protracted period of fairly modest performance across the hedge fund industry compared to major indices, AIMA says the past year has witnessed increasing levels of confidence. “Prospects for the hedge fund industry are as strong as they have been in over a decade,” it states. “Year-to-date, hedge funds on average are posting double-digit returns net of fees with the mood across the industry being further boosted by continued positive net inflows in the first half of this year.

“Although the COVID-19 Delta variant has dampened the mood a little among North American based funds, the overall impression is that this is a temporary setback with travel expected to recover strongly over the next quarter,” it continues. “With the prospect of managers and investors being able to meet regularly in person for the first time in nearly two years, this could be the catalyst for a surge in hedge fund interest, including new capital investment and fund launches.”

The optimism does come with a caveat, however, for AIMA also points out that despite the impressive confidence levels, it remains bedevilled with a wide variety of challenges from increased regulatory around the globe, talent management and operational hurdles, not to mention beginning to adjust to the new, in-person working COVID environment.