Hedge Fund Confidence Levels Rise, Thanks to UK Managers

The latest quarterly survey by the Alternative Investment Management Association (AIMA) finds that in spite of challenging conditions hedge fund confidence has risen slightly from Q4 2021, thanks mainly to macro and multi-strategy manager performance.

The AIMA Hedge Fund Confidence Index is a new global index that measures the level of confidence hedge funds have in the economic prospects of their business over the next 12 months. A product of AIMA, Simmons & Simmons and Seward & Kissel, the index is calculated during the final two weeks of each quarter and published at the start of the subsequent quarter.

AIMA sampled more than 300 hedge funds (accounting for approximately $1.9 trillion in assets for the index, and found the average measure of confidence (in the economic prospects of their business over the coming 12 months) is +17, just over one point higher than the score reported in the fourth quarter of last year.

Amidst greater market turbulence, increasing geo-political tensions in Ukraine, as well as a renewed set of regulatory challenges in particular for the private fund industry in the US, over 90% of all hedge funds that participated in the index are confident in the economic prospects of their business over the coming 12 months, AIMA says.

Observing the funds’ confidence levels based on size, AIMA split the population of responses into larger funds (those that manage greater than $1 billion in assets) accounting for 72% of the total number of responses, while smaller funds make up the remaining 28%. In comparison to the fourth quarter, larger fund managers express the highest levels of confidence, posting three points higher than smaller managers.

On a regional basis, two out of the three global regions posted lower confidence levels than in the fourth quarter of last year. Hedge fund firms in the UK continue to buck the trend set by their regional peers, with the average confidence score by UK hedge funds being above +20 for the second time in the last three quarters. Notably, AIMA says nearly half of all participants (47%) this quarter are UK based, helping to underwrite the global average confidence score.

By comparison, confidence levels among APAC and North American hedge fund managers continue their downward trend of recent quarters with the latter reporting their lowest confidence score to date, 42% from the high recorded in Q2 last year. The largest disparity in the confidence scores reported this quarter is reflective of the region where hedge funds are based rather than their strategy or size, AIMA says.

“Through the end of February, hedge fund returns have been mixed,” AIMA says. “While some fund strategies have experienced a challenging start to the year, others have thrived. Undoubtedly performance dispersion across the industry has become even more pronounced.

“Upon closer examination of the hedge fund strategies that we polled, global macro (+19) and multi- strategy (+18) reported the highest confidence scores,” it adds. “It is therefore little wonder why both were voted as being among the most popular strategies that investors would allocate to in the first six months of this year. As we close the quarter, indications are that investors have made good their intentions, with industry vendors suggesting that there have been net inflows over the quarter.”

Elsewhere, AIMA says that regulatory and compliance headwinds across the industry have intensified, in particular for private funds following a series of proposals announced by the SEC in March. “If approved in their current form, they would represent a serious overhaul of existing market practices, with potentially disruptive consequences,” AIMA warns.

Despite the challenges and the threat of more still to come, AIMA says the hedge fund industry’s global confidence score for Q1 reflects the fact that funds are reinforcing their value proposition of offering investors financial security and uncorrelated returns during uncertain times.