Hedge Fund Confidence Higher, but Still Lagging Long-Term

The latest AIMA Hedge Fund Confidence Index, which is produced alongside Simmons + Simmons and Seward & Kissel, finds that sentiment has increased from the end of 2022, but remains below the historical average.

The latest quarterly survey is based upon results from a sample of 272 hedge funds with around $1.9 trillion in assets under management, with the average measure coming in at +16.3. Although up from Q4 2022’s 14.1, this is the third lowest quarterly score since Q4 2020 and is below the historical average of +17.9. Steve Nadel, partner at Seward & Kissel, says, “While the nearly 16% increase in the average HFCI score from last quarter is encouraging, it remains to be seen whether this momentum will continue given the current market environment.”

On a regional basis, AIMA says the UK remains the standout in terms of consistently high confidence relative to other comparable peers, albeit it is below EMEA (ex-UK) in the latest survey at +18. The UK’s pool of respondents is dominated by relatively large long-short equity, global macro and multi-strategy funds all of which were among the most confident strategies.

EMEA (ex-UK) was notable for being extremely overweight fund managers based in the Middle East and scored +22.2, however AIMA says taken alone, Middle Eastern fund managers reported an average confidence score of +22.6. Similar to the UK, it says these fund managers are most likely to be larger and follow long-short equity of global macro strategies. It also had 100% of respondents reporting a positive sentiment score.

Meanwhile, APAC’s confidence score of +10.6 is dragged down by half of the population of respondents being smaller managers, along with some extreme scores reported across the region from global macro managers, fund of funds, long-short equity – that all reported an average score around -20.

The average AUM of APAC-based managers ($3.7 billion) is dwarfed by UK and Middle Eastern respondents – $8.7 billion and $8.2 billion, respectively – underscoring the notion, AIMA suggests, that confidence might primarily be a function of size more than other factors.

Of UK-based fund managers, 96% posted a positive confidence score, compared to 80% of APAC-based respondents. Interestingly, all of the larger fund managers that reported a negative score are based in APAC, providing further drag on average confidence.

In APAC, the region remained fairly consistent in its outlook throughout 2022 although the Q4 downturn only narrowly beat its lowest-ever score, recorded in Q4 2020. The region had a slightly greater proportion of smaller managers and also a relatively high percentage of respondents representing the smallest cohort of managers, both of which served to depress the average confidence number.

AIMA says that managers have overwhelmingly managed to maintain a positive outlook in their economic prospects for the coming year with over 90% reporting a positive confidence score, despite the poll being taken “amid a particularly tumultuous period in financial markets”.

It observes that the collapse of Silicon Valley Bank and forced sale of Credit Suisse, followed by concerns around regional US banks more broadly, caught many investors off guard and drove some hedge funds to trim their exposure to US banks and banking stocks.

“Overall, the highly-fluid environment is instilling uncertainty across financial markets that undermines confidence and gives a distinct impression that gains today may be lost tomorrow,” it states. “Meanwhile, the retrenchment of inflation in some markets and noises from central banks that it may hike rates still further are also adding to the melee of factors impacting hedge funds and forcing regular portfolio recalibrations.”

AIMA does see what it describes as “some green shoots of optimism”, however, with recent data on fund launches indicating they were on the rise in Q4 2022, with 96 funds making their debut, rising from 71 in the prior quarter, the lowest level since Q4 2008. That sais, AIMA says away from the front office, operational challenges abound for fund managers of all sizes that must carefully consider ongoing investments in technology and talent as higher costs and volatility become the new normal.

The latest survey also highlights the continuing regulatory challenges globally, but particularly in the US, that began in early 2022. AIMA says these continue to “rumble on” with “scant detai”l on what the final version of the sweeping reforms might look like, and the ultimate impact on the business model of firms unknown. “The prospect of many more months of regulatory limbo will not be appealing to firms seeking long-term stability,” it points out.

Notwithstanding these headwinds, AIMA says the headline finding of the first HFCI of 2023 is that the average fund manager remains cautiously optimistic for the future and the volatility will also bring new opportunities to offset the challenges. This is reflected by Tom Kehoe, global head of research and communications at AIMA, who says, “Despite the March madness that beset global financial markets, hedge funds remain cautiously optimistic, with the current environment also presenting investment opportunities. Further reasons for optimism include increased hedge fund appetite among investors looking to best preserve their savings while the pipeline for new fund launches is slowly picking up.”