Hedge Fund Confidence Remains Strong: AIMA

The latest edition of the Hedge Fund Confidence Index (HFCI) has continued a trend of hedge fund optimism at the start of the year compared to Q4, by finding higher confidence amongst managers over their firm’s ability to raise assets, generate positive revenue for the business and the overall performance of their funds.

The HFCI is produced by hedge fund manager association AIMA, in conjunction with Simmons & Simmons and Seward and Kissel, with respondents asked to select a value from -50 to +50 to rate their confidence. The results show an average confidence level of +19, an increase of three points from the previous quarter.

The survey polled approximately 180 hedge fund firms worldwide, collectively managing approximately $900 billion in assets, AIMA says over 85% of those polled in the first quarter had a positive confidence score. Over 80% cited the overall performance of their funds and their firm’s ability to generate revenue and manage costs as the two factors that increase their confidence levels the most. Meanwhile, 70% of firms polled consider their ability to raise capital as a source of optimism.

AIMA observes that historically, the overall confidence score rebounds in Q1 after lows in Q4, however it notes that in this quarter bullish sentiment was the highest of any Q1 score since the HFCI launched, taking the overall score back above the historical average. It adds the overall number was reinforced by smaller hedge fund managers (those managing less than $1 billion), which reported a significant uplift in overall confidence that aligned them with their larger peers.

It was, in fact, the first time larger and smaller hedge fund managers reported the same confidence scores. AIMA says the convergence was driven by smaller firms with an average confidence score three points higher than the group’s historical average. Larger hedge fund managers are also more bullish than at the end of last year, but the reversal in sentiment is less substantial than with their smaller peers.

The increase occurred across all regions, particularly EMEA (excl. UK). Almost all strategies also reported greater confidence levels, led by global macro and private credit fund managers. EMEA-based hedge funds again enjoy the highest levels of confidence versus their global peers, driven by hedge fund managers based in the UAE, which AIMA says undoubtedly received another boost following the news that the Middle Eastern financial hub will be removed from the Financial Action Task Force (FATF) grey list, following its introduction in 2022.

In the EMEA (ex-UK) report, no funds reported negative confidence scores, with the average being +23. The overall Q1 confidence score was boosted by positive sentiment reported by billion-dollar global macro, CTA/managed futures and multi-strategy funds.

Indications of an improving launch environment for hedge funds are evident, with several high-profile fund launches, especially in multi-strategy and credit funds, which remain highly popular among investors, expected soon

By comparison, UK-based survey respondents scored lower than those its global peers, with an average confidence score of +17.5. The UK’s average confidence score was dragged lower by long-short equity and long-only funds, which are the two lowest strategies as a measure of confidence this quarter, AIMA says, adding, long-only funds reported an average score of -1.

It does note, however, that the average confidence score of UK-based fund managers increased by over five points from the confidence low reported in the fourth quarter of last year, reverting to the historic mean.

Survey respondents based in APAC expressed greater optimism than their global counterparts in several key areas, including delivering on performance, managing their bottom line and raising capital. The latter two categories had over 90% of APAC respondents citing that these increased their confidence levels.

Interestingly, AIMA points out, despite hedge fund managers based out of the Middle East scoring high confidence numbers, just under 40% are basing their confidence levels on their ability to raise capital, and over half are saying that it is more challenging to manage their bottom line. As for the remaining regions, AIMA says the view is similar to that expressed in Q4 2023, with most firms expressing confidence in their ability to continue to deliver performance for their investors, raise capital and manage the bottom line.

Looking ahead, the HFCI report cites strong equity market performance globally for the optmistic outlook and adds that while interest rates remain unchanged, “the real question is not if, but how many cuts will occur this year”.

It observes that historically, periods of monetary easing have led to rallies in equity markets. “If this pattern holds, institutional investors might have the opportunity to adjust their investment strategies and consider alternative investments, a shift our data suggests is already beginning,’ AIMA states. “However, this optimism could be challenged if unexpected high inflation delays the anticipated rate cuts, potentially undermining the recent progress.

“Improved regulatory clarity in the US in the coming months could further enhance hedge fund managers’ confidence by enabling better long-term planning,” it continues. “With interest rates expected to decrease and other challenges likely to lessen, the environment for raising capital appears increasingly favourable for hedge funds. Indications of an improving launch environment for hedge funds are evident, with several high-profile fund launches, especially in multi-strategy and credit funds, which remain highly popular among investors, expected soon.”