Hedge Fund Confidence at Highest in Two Years

The latest AIMA Hedge Fund Confidence Index indicates that funds are at their most optimistic about their businesses since the Index was first produced in 2020.

The Q3 Index, which is produced with Simmons+Simmons and Seward & Kissel, produced a score of +25.4, with the majority of respondents (58%) in the 21-30 band, 20% in the 31-40 band and 18% were 11-20. Interestingly, given the brewing political upheaval in the UK, that centre had the highest regional index at +25.6, while Asia Pacific was +23.3, and the US was +23.2.

Largely reflecting their year-to-date performance, AIMA says, among the population of respondents from the Middle East and Europe-based funds, these predominantly comprise of macro funds and multi-strategy funds, both enjoying the highest confidence levels of all the strategies that reported to the index this quarter. By comparison, 60% of all North American based funds that it polled are long-short equity funds which reported the lowest levels of confidence among the strategies well represented in the index this quarter.

“It appears as if the latest HFCI score for North American-based hedge fund managers may be reflective of the increased certainty managers now have about the Fed’s future direction on interest rates and thus they are able to plan accordingly in terms of implementation of their strategies,” says Steve Nadel, partner, investment management, at Seward & Kissel.

Muneer Khan, partner, Middle East, at Simmons & Simmons, adds, “It is pleasing to see the positive sentiment expressed from those based in the Middle East. The high scores for the region are possibly due to increased oil and gas revenues, as well as more focused government economic diversification efforts, leading to managers attracting more AUM from sovereign and sovereign related investors in the region. We have also over the past 12-18 months seen an increasing flow of managers setting up in financial centres such as the DIFC in Dubai, to support their marketing efforts and in order to attract and retain portfolio manager talent relocating from the US, Europe and Asia.”

The index measures the average level of confidence in hedge funds’ economic confidence in their business, with respondents asked to choose a range between +50 (highest confidence) and -50, by considering their firm’s ability to raise capital, generate revenue and manage costs, as well the overall performance of their fund(s).

Larger managers (over $1 billion in AUM) are more confident than those managing under $1 billon, by more than two points. While this is the third consecutive quarter this has been the case, the gap is narrowing, it was 5.5 points in Q2.

Tom Kehoe, global head of research and communications at AIMA, says: “Amid increasing turbulence across financial markets, hedge funds are reasserting their value proposition among investors who crave for capital preservation and portfolio diversification. Headwinds remain in the form of new regulatory and compliance demand, particularly coming out of the US as well as higher inflation levels and interest rate tightening, both likely to impede on a firm’s ability to manage their business.”

From a performance perspective, AIMA observes the average hedge fund is down between 4%-6% on the year (according to various data providers), although some hedge fund strategies, (global macro and managed futures to name but two) are delivering some very strong gains for their investors. By comparison, a 60/40 portfolio investor (for a long time regarded as being the optimum investment strategy for pension plans and other institutional investors) has lost nearly 20% year to date.
The report also takes aim at potential US regulatory moves, which it believes is a potential headwind amid “cautious optimism” overall in the industry. “The US in particular has witnessed an unprecedented inflow of new industry proposals which, if enacted, would make managing business extremely challenging and expensive for private funds,” AIMA writes. “Not a week seems to go by without another proposal being put forward by the US SEC, amidst the most serious overhaul of existing market practices for the private funds industry. Elsewhere, European and APAC hedge fund managers are also having to consider a raft of new industry regulation being discussed which would impact how they manage their business.”