Hedge Fund Confidence Drops in Q4: AIMA

Perhaps unsurprisingly given the struggle many had in November, the AIMA Hedge Fund Confidence Index fell sharply in Q4 to the lowest level in what has been a generally buoyant 2021.

The Index, which is created jointly by AIMA, Simmons & Simmons, and Seward & Kissel, is calculated during the final two weeks of each quarter. Respondents are a 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).

More than 300 hedge funds representing approximately $1.7 trillion in assets, responded to the Q4 survey, resulting in the average measure being +15.8, down from +20.41 in Q3. While this is the lowest score of the year, AIMA says over 90% of participating funds are confident in the economic prospects of their business over the coming year.

The survey also looks at confidence by fund size and breaks down the responses either side of the $1 billion AUM threshold – 55% of responses came from funds managing over $1 billion. Larger funds were slightly more confident, the sub-index coming in at +16.2, down from +18.6 in Q3, while those below the $1 billion threshold achieved a rating of 15.4, down from +21.6 in Q3.

Geographically, UK hedge funds are the most optimistic, with a confidence score of +18.2 (down from 21.3 in Q3); while EMEA, including the UK, is +17.5 (+20.8); APAC is +16.0 (+19.5); and the least optimistic is the US at +13.9 (+20.4).

The results are surprising in that generally we find the market to be optimistic about the prospects of the coming year,” says Nicholas Miller, senior associate, investment management, at Seward & Kissel, when looking at the US score. “Many of our clients continue to successfully launch new products and there are a number of new funds in the works for early 2022. However, the Q4 reporting period coincided with a significant market selloff and also concerns regarding inflation, and so that could be some of what we are seeing in these results.”

As far as the UK results are concerned, Devarshi Saksena, partner, hedge funds, Simmons & Simmons, says, “It is great to see confidence levels amongst UK managers continuing to be strongly positive. Despite the obvious challenges, managers are seeing opportunities in the markets and investors who want to put their money to work – and that is definitely reflected in the number of new funds we are working on. It will be interesting to see if the slight reduction of positive sentiment in the US crosses over to managers in the UK and elsewhere over the next quarter.”

AIMA cites “a number of headwinds” emerging including challenging performance and prevailing regulatory and compliance issues, noting that November performance figures saw hedge funds give back some of the gains made over the past 18 months as financial markets got spooked by renewed fears regarding the spread of the Omicron coronavirus variant and to what extent this would arrest the pandemic recovery. Inflationary concerns exacerbated the problem, with bond markets experiencing a difficult time resulting in some macro funds enduring a challenging end to the month.

Regulatory and compliance headwinds have also picked up, the association observes, with the pace of regulatory change accelerating in the UK and EU as each side seeks to forge a new path post Brexit, while regulators in the US have hinted that asset management firms there are likely to see a greater volume of supervisory action over the coming year.

Notwithstanding the November performance setback, year to date, AIMA stresses that hedge funds on average are posting double-digit returns net of fees. Allocations to hedge funds continue to be brisk, it adds, including into new strategies (across both public and private markets) as investors look to the qualities of hedge funds to best manage any downside risk arising from market volatility and deliver on performance better than any other asset class.

“The downturn in average confidence score for this quarter reflects the intensifying market headwinds of the moment, ranging from the growing volume of regulatory scrutiny to new COVID variants and inflationary uncertainty,” confirms Tom Kehoe, global head of research and communications at AIMA. “Regardless, the latest score should not distract from what has been a strong year for many hedge funds overall. The data shows that vast majority of hedge funds remain cautiously optimistic about their economic prospects for the year ahead.”