Hedge Fund Confidence Declines in Q4: Remains Historically High

The latest Hedge Fund Confidence Index, published by AIMA in association with Simmons & Simmons and Seward & Kissel, shows that while the overall confidence score has dropped from Q3, it sits at a historic high for Q4 since the survey began in 2020.

The latest survey asks 100 hedge funds managers to select the appropriate level of confidence 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. They are also asked to judge their firm’s ability to raise capital, generate revenue and manage costs, and naturally, their funds’ performance.

At +18.8, the Q4 HFCI is down from +20 in Q3, but up on December 2023’s score of +15.6. For 2024 as a whole, the Index has reflected growing confidence amongst managers, with only Q3, at +20, failing to be the same period of 2023 (+21.6). The long-term average of the HFCI is +17.8. AIMA says 86% of respondents reported a positive confidence score, a marginal drop from 91% in Q3.

The good news for hedge funds is that Q4 has historically been the quarter with the lowest confidence score, however this year it is above Q2’s +16.5 and only marginally below Q1’s +19. This suggests a more stable level of optimism among hedge funds, AIMA observes.

Strong optimism around upcoming performance and capital raising opportunities were the core drivers of confidence in the latest survey, according to AIMA, which adds that 93% of respondents expressed confidence in their fund’s ability to perform, a slight uptick from 92% in Q3. Similarly, confidence in fundraising improved, with 86% of hedge fund managers citing it as a positive factor, a modest rise from Q3.

“Strikingly, the bullish attitude to performance was demonstrated by both larger and smaller respondents, with confidence scores holding steady from 96% to 98% for smaller hedge fund managers and from 89% to 88% for larger hedge fund managers,” AIMA states. “When asked about their ability to raise capital, this trend was mirrored for both larger and smaller hedge fund managers.

“On average, hedge fund managers are also more confident in their cost management ability for the year ahead than they were in Q3,” it continues. “20% of respondents indicated that managing expenses was a drag on their confidence, down from 27% in the previous quarter. Larger hedge fund managers were disproportionately affected, with 16% citing cost concerns compared to 12% of their smaller peers.”

This indicates, AIMA says, that the hedge fund industry remains cautiously optimistic and while performance potential and investor interest drive confidence, the enduring challenge of cost efficiency continues to shape sentiment across the board.

From a strategy standpoint, global macro and multi-strategy funds lead the way. AIMA says multi-strategy was the only strategy to experience a rise in confidence, increasing from +17.8 to +18.3. While global macro funds recorded a 2.3-point decline from the previous quarter, their confidence level of +18.5 remains the highest among all strategies. In contrast, long-short equity funds experienced a significant quarter-on-quarter drop in confidence, falling by 6.2 points.

North America funds continue to be the most confident, indeed they have extended their confidence lead over other major regions with a score of +20.0, driven by strong confidence in fundraising ability and delivering performance. “However, the more intriguing narrative lies in the convergence of confidence levels across three key regions,” AIMA observes, adding that historically, confidence scores among North America, the UK, and APAC have displayed noticeable disparities.

Over the past five quarters, however, the gap between the regions has shrunk significantly, reflecting a growing consensus among hedge fund managers. The gap has narrowed between the UK and APAC – which both saw drop-offs in their average confidence scores. Meanwhile, while still registering a modest decline in confidence from Q3, North America demonstrates a greater degree of resiliency for the year ahead. As a distinct geography, the Middle East also recorded a high confidence score, however AIMA says the sample size was relatively small.  The UK experienced the most significant decline in confidence among all regions, with its score dropping from +21.4 to +18.1. “This dip can be attributed to only 79% of UK respondents reporting a positive confidence score, compared to 86% in APAC and 89% in North America,” AIMA says.

Average confidence levels declined for larger and smaller hedge fund managers, but the overall score remained relatively steady. Smaller hedge managers extended their lead over larger hedge fund managers, with the gap between the two growing from +0.9 to +3.1. “This is due to smaller managers’ confidence holding steady, whereas larger managers saw a notable drop of 2.4 quarter-on-quarter,” AIMA says.

Smaller hedge fund managers recorded a confidence score of +20.3, significantly exceeding their historical average of +16.1, while larger hedge fund managers reported a score of +17.2, down from Q3’s +19.6, however, their sentiment held close to the group’s rolling average, demonstrating stability despite ongoing cost pressures.

“Given the recent electoral, geopolitical and economic developments event of the past few months, it’s unsurprising that the greater degree of certainty has inspired higher confidence than in prior Q4 surveys,” says Tom Kehoe, global head of research and communications at AIMA. “The data suggests that hedge fund managers have cautious optimism that 2025 will be a fruitful year.”

Devarshi Saksena, partner, head at Simmons & Simmons, adds, “Despite facing cost efficiency challenges, the industry’s cautious optimism suggests a robust belief in its ability to overcome economic uncertainties and seize growth opportunities.”

Steve Nadel, partner at Seward & Kissel, observes, “It’s not at all surprising that there was a dip in the latest quarterly numbers. This may be attributable in part to the uncertainty surrounding a second Trump administration, based on his recent campaign statements as well as his actions during his first term.”