Hedge Fund Confidence Rises, But…
Posted by Colin Lambert. Last updated: October 22, 2024
The latest Hedge Fund Confidence Index published by AIMA in association with Simmons + Simmons and Seward & Kissel, highlights a rebound in confidence among hedge funds for Q3, however things are so positive through a historical lens.
The Q3 2024 confidence score was +20, up from +16.5 in Q2, and above the rolling average of +17.8. For the survey, 133 hedge fund firms worldwide were interviewed, collectively managing just over $800 billion in assets under management (AUM). It is notable, however, that since the index was first published in 2020, Q3 has been the quarter to exhibit the highest confidence score and this is the lowest yet recorded for the quarter, behind +25.4 in Q3 2002, +21.6 in 2024 and +20.4 in 2021.
AIMA says the revival of confidence was present across both larger hedge fund managers – classified as those managing more than $1 billion – and their smaller peers. Based on quarterly scores going back to Q4 2020, the average score difference between larger and smaller respondents is 3 points, with larger managers being more bullish for most of that period.
This quarter, however, AIMA points out there is less than 1 point between their scores and smaller managers are describing themselves as more optimistic. While confidence among larger managers has increased compared to Q2 2024, it was the notable rise in confidence among smaller managers that contributed to the overall score reaching its highest level since Q3 2023.
In creating the index, managers are asked specifically about their firm’s ability to raise capital
and generate revenue as well as manage costs; the overall performance of their fund(s) is also a factor. The report suggests that investors will be buoyed to read that the uptick in optimism appears to be driven by hedge funds confidence in their funds ability to perform, with 92% of respondents saying that was a source of positivity, up from 78% in Q2.
The bullish attitude to performance was demonstrated by both larger and smaller respondents with confidence scores increasing from 78% to 89% for larger managers and from 77% to 96% for smaller managers.
Hedge funds confidence in their ability to raise capital also increased for both groups of hedge fund managers compared to the previous quarter, albeit by a smaller degree, however, the ability to manage costs and turn a profit appears remain a headwind for some managers. Over a quarter of respondents said this factor deflated their confidence, up from 22% last quarter. Notably, larger managers report being more concerned about managing costs than their smaller peers, with 36% saying it was undermining their confidence.
The Q2 drag on sentiment caused by performance was illustrated by the latest performance and capital flows data from Preqin. Overall, hedge funds collectively lost $9 billion in net outflows in the second quarter. As of June 30, hedge funds took net redemptions of $6.3 billion year-to-date. Net redemptions, or cash outflows, have been an ongoing issue for hedge fund managers. The industry has seen negative flows in seven of the past 12 quarters.
North American managers were the most confident, rising above the UK which was ahead in Q2, however the report observes “an arguably more interesting sub-plot” in the convergence of confidence score between the North America, the UK and APAC, which has been playing out over several quarters.
Before Q3 last year, the average range of scores between the most and least confident of these three regions has been 5.1, but for the five quarters since then, that range has dropped to 2.9. “The data suggests a greater degree of consensus among hedge fund managers across these regions, perhaps demonstrating the global macroeconomic challenges they all face,” the report states. “The three regions’ scores historically cluster during Q3, with the least confident region usually rising to rejoin its peers, but, unlike previously, the trend have persisted now for 12 months.
“Whether the regional confidence score volatility will return as the current rate cycle and other meta themes for global markets give way to more local challenges is a question for future editions of the HFCI,” it adds.
“Looking at Q3 2024, it’s clear that there’s been a notable uptick across the board,” observes Devarshi Saksena, partner, head at Simmons + Simmons. “Specifically, the UK market stands out with its performance. After a journey of ups and downs, this quarters high confidence level really highlights the UK’s strong position and resilience. It’s a clear indicator of the market’s recovery and growth, signalling a positive outlook for the future.”
Steve Nadel, partner at Seward & Kissel, adds, “Q3 2024 continued the see-sawing confidence trend we first detected back in 2022 where confidence goes up one quarter and down the next. However, given the extremely strong confidence demonstrated in Q3, especially in the North America, UK and long-short equity categories, we may be witnessing a breakout from previous trend lines. This may be attributable to, among other things, increased clarity in the various positions of the two US Presidential candidates and the recent decrease in interest rates.”
Looking ahead, the report says industry patterns are likely to continue to be shaped by the ongoing challenges of cost management, particularly for larger firms, as well as emerging themes like the end of the current rate cycle and other macroeconomic shifts. “As hedge funds navigate these evolving conditions, future HFCI reports will reveal whether this newfound optimism persists or if regional and firm-size disparities will resurface, potentially driving new trends in capital raising, performance, and cost management,” it states.