Hedge Funds Maintain Business Confidence: CTAs, Macro Leading the Way

The Q2 Hedge Fund Confidence Index (HFCI) which is published by AIMA, Simmons & Simmons and Seward & Kissel, finds that hedge funds are cautiously optimistic about their business prospects for the next 12 months, with CTAs and global macro funds reporting the highest confidence scores at +26 and +20.5 respectively. The Index has a range of +/- 50 with +50 representing the highest possible level of confidence.

The report notes that while confidence levels remain “upbeat” – the overall Index registered +17.8, up from Q1’s +17 – from a performance perspective, returns continue to be mixed, with some strategies experiencing a challenging start to the year. The high scores from CTAs and macro funds reflect, AIMA says, the notable gains made by hedge funds running these strategies. In contrast, and again unsurprisingly given the sector’s travails, crypto hedge funds were the lowest on confidence, but even here they turned in a positive score of +5.5.

The report further observes that confidence is high in spite of the industry facing intensifying regulatory and compliance headwinds. “The US in particular has witnessed an unprecedented inflow of new industry proposals which, if enacted, would make managing business extremely challenging and expensive for private funds,” the report states. “Not a week seems to go by without another proposal being put forward by the SEC, amidst the most serious overhaul of existing market practices for the private funds industry.

“European and APAC funds are also having to consider a raft of new industry regulation being discussed which would impact how funds manage their business,” it adds.

360 hedge funds accounting for around $2.3 trillion-worth of assets took part in the survey, with just 13.4% of respondents thinking negatively about their prospects. The highest confidence score was +21/30 with 48.4% of respondents picking in that range, followed by +11/20 (24.8%) and +31/40 (8.4%).

For the second successive quarter, larger fund managers expressed the highest levels of confidence, posting over five points higher than smaller managers. The latter, consisting of funds managing less than $1 billion, provided a +14.5 confidence score, while larger managers’ rating was +20.

UK hedge fund performance has been underpinned by a strong showing from global macro, CTA, multi-strategy and long-short credit funds

On a regional basis, all three global regions posted higher confidence levels than their previous score, in an almost complete reversal to the first quarter report, when two out of three regions reported lower scores. Hedge fund firms in the UK continue to positively surprise on the upside, with the average confidence score being above +20 (actually at +21.03) for the second successive quarter, having been above this threshold for three out of the last four quarters. EMEA funds’ score was +20.8.

“It is pleasing to see UK hedge fund managers showing resilience in the face of market turbulence,” says Devarshi Saksena, partner, hedge funds, at Simmons & Simmons. “We see similar trends amongst our client base. Quant/systematic managers have performed well throughout recent market volatility – and there remains a high level of interest in crypto and other digital assets focussed products.”

Confidence levels among APAC (+15.6) and North American (+16.4) fund managers have also picked up from the first quarter. The average confidence score in both regions lags the global leading score reported by UK managers, where confidence levels have been underpinned, the survey finds, by a strong showing from global macro, CTA, multi-strategy and long-short credit funds. In comparison North American funds that polled were predominantly from relatively less confident long-short equity funds while the APAC confidence score was negatively impacted by digital asset funds (which scored on average +5.5).

“The confidence among CTA managers is to be expected given the current macroeconomic and geopolitical environment,” says Dan Bresler, partner, investment management, Seward & Kissel. “Fundraising among CTA managers is also aligned with their level of confidence, given the substantial inflows into those strategies thus far in 2022. With respect to regulatory and compliance headwinds in the US, we certainly anticipate an increased level of regulation but to what extent is still to be determined as many of the current SEC proposals have yet to be adopted.”

Tom Kehoe, global head of research and communications at AIMA, adds, “As traditional asset classes come under increasing pressure from global macro factors from inflation to geo-political tension, hedge funds are coming to the fore to provide downside risk and uncorrelated returns for their investors. Although there is a wide dispersion in fund performance reported across the industry, the overall lift in confidence this quarter compared to Q1 reflects the better performance of the alternative investment market compared to traditional market investments during this challenging period.”