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Hedge Fund Managers Are Confident About The Next Year Despite The Many Headwinds

Despite the weak performance numbers we’re seeing from sources like Eurekahedge and Citco, hedge fund managers generally report being confident about their funds’ economic prospects over the next 12 months. Soaring inflation and the geopolitical turmoil hovering over Europe right now aren’t taking a bite out of hedge fund confidence either.

For May, Eurekahedge reported a decline of -.57% on an equal-weighted basis and a decline of 0.32% on an asset-weighted basis for reporting hedge funds. It was the second straight month of declining performance for hedge funds, driven by aggressive interest rate hikes that stoked fears about a recession. Meanwhile, hedge funds administered by Citco returned -1.1% for May.

Background on the survey

The Alternative Investment Management Association (AIMA) has released its new Hedge Fund Confidence Index, which measures the level of confidence hedge funds have in their business’ economic prospects over the next 12 months. In partnership with Simmons & Simmons and Seward & Kissel, AIMA surveyed hedge funds representing in aggregate approximately $2.3 trillion in assets under management about their level of economic confidence.

AIMA asks respondents to choose a number between -50 and +50, with +50 representing the highest level of economic confidence in their firm over the next 12 months. When thinking about where they fall on that scale, hedge fund respondents are asked to consider three factors. They are the firm’s ability to raise capital, its ability to generate revenue and manage costs, and its overall performance.

Breakdown of respondents

According to AIMA, 32% of the respondents are in North America, while 38% are in Europe, the Middle East, and Africa, and the remaining 30% are in the Asia Pacific region.

The largest percentage of hedge funds surveyed, at 22%, managed between $1 billion and $4.9 billion in assets. About 16% of the hedge funds managed $5 billion to $9 billion, and about 12% managed at least $20 billion. Two categories, $500 million to $999 million and $250 million to $499 million, each accounted for around 11% of the funds surveyed.

The remaining percentages were split among four more size categories, ranging from about 10% for funds between $10 billion and $19.9 billion down to less than 2% for funds with $51 million to $100 million.

Second-quarter results

For the second quarter, AIMA took a sample of 360 hedge funds and found the average measure of confidence in their economic prospects at +17.8. That reading was almost one point higher than the confidence level recorded by AIMA in the first quarter.

The organization noted that the turbulence in the market increased alongside geopolitical tensions in Ukraine during the second quarter. The quarter also brought renewed regulatory challenges, particularly for the private fund industry in the U.S.

Despite all those issues, more than 85% of the hedge funds that participated in AIMA’s quarterly index are confident in the economic prospects of their business over the next 12 months compared to the last 12 months.

About 48% of funds rated their confidence between 21 and 30, while one-quarter delivered a rating between 11 and 20. More than 8% rated their confidence between 31 and 40, while about 2% gave a rating between 41 and 49.

At the other end of the spectrum, about 1% each gave ratings between -49 and -40 and between -39 and -30. Only 13.4% provided a negative rating regarding their economic confidence, while 86.6% were positive to some degree.

Confidence by size and locations

Looking at the respondents by fund size, those with less than $1 billion in assets under management had an overall confidence score of +14.5, with the largest percentage giving a score of 21 to 30, at 39%. Funds with more than $1 billion in assets scored their confidence level at +20. Once again, the largest percentage gave a score between 21 and 30, at more than 50%.

Regionally, all geographies reported higher confidence levels than in the first quarter. The second-quarter report marked an almost total reversal from the first-quarter report, when two of three regions reported lower confidence scores.

U.K. hedge funds continue to surprise to the upside, with the average confidence score being above +20 for the second straight quarter after being above that level in three of the last four quarters. APAC and North American fund managers are also more confident now than they were in the first quarter, although, interestingly, U.K. fund managers are more confident than those in these two regions.

U.K. funds utilizing global macro, CTA, multi-strategy and long/ short credit strategies are particularly confident. On the other hand, the North American funds that participated in the survey came from less confident long/ short equity funds. Digital asset funds negatively impacted the APAC score with their average score of +5.5.

Overall, EMEA funds scored +20.8, while U.K. funds averaged a score of +21.03. North American funds recorded a confidence score of +16.4, while APAC funds reported a score of +15.6.

Overall commentary on hedge fund confidence

Despite the choppy returns from the majority of hedge funds and hedge fund indices like Eurekahedge and Citco, fund managers generally remain confident about their prospects. However, as evidenced by the numbers reported in the different regions, the recorded confidence level varies widely by strategy, skewing the results.

The economic and geopolitical challenges the market faces right now include the war in Ukraine, inflation levels at 40-year highs, and monetary policy tightening. Increased regulatory and compliance demands would also be expected to weigh on hedge fund manager confidence.

To study the strategy-based skew within its results, AIMA looked more closely at the hedge fund strategies it polled. Unsurprisingly, the organization found that CTA and global macro funds reported the highest confidence scores, at +26 and +20.5, respectively. Both strategies have brought sizable returns for their investors year to date.

On the other hand, crypto hedge funds reported the lowest confidence level at +5.5. Again, this is not surprising because of the challenging conditions in the crypto markets year to date.

Hedge funds face increasing regulatory and compliance headwinds, especially in the U.S., which has witnessed an unprecedented inflow of new industry proposals. If they are enacted, managing private hedge funds in the U.S. will become extremely challenging and expensive.

Hardly a week goes by without another proposal from the Securities and Exchange Commission. The organization described the headwinds as “the most serious overhaul of existing market practices for the private funds industry.” Hedge funds in Europe and the APAC region are also having to consider large numbers of new industry regulations under discussion.

However, despite all these challenges and the threat of more, hedge fund managers around the globe are cautiously optimistic about their economic prospects for the next 12 months. Following sharp corrections in the global financial markets and expectations of higher volatility, fund managers are reinforcing their value proposition through better management of downside risk and the offer of financial security for their investors.

Michelle Jones contributed to this report.

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