Posted by Colin Lambert. Last updated: July 5, 2024
Hedge fund managers remain confident for their prospects looking ahead, but levels have dipped below the historical average as measured by AIMA’s Hedge Fund Confidence Index, produced in association with Simmons & Simmons and Seward and Kissel.
The Index measures manager confidence in terms of their firm’s ability to raise capital, generate revenue, manage costs and the overall performance of their funds. In Q2 it was 16.5, down from +19 in Q1 and below the rolling historic average of +17.7, but above Q2 2023. This, says AIMA, is in spite of the respondent pool (of around 250 managers), being dominated 80/20 in favour of larger hedge funds (with an AUM greater than $1 billion), which are historically more confident than their smaller peers.
That said, AIMA observes, those smaller hedge fund managers who responded recorded a significant confidence downturn this quarter. Their 10% average confidence dropped to +13, down from +18.9 in Q1. Overall, 92% of respondents reported a positive confidence score, but, broken down by AUM, 96% of larger hedge fund managers offered a positive sentiment score, compared to 0% 77% of smaller firms.
AIMA adds that an additional factor causing a drag on the overall performance level is the large portion of long-short equity respondents, who are once again the least confident group surveyed by strategy. So far, these hedge fund managers have failed to regain confidence despite the positive performance of major equity markets and the prospect of interest rate cuts later this year, it says.
“This quarter, hedge funds are treading more cautiously amid ongoing industry headwinds and geopolitical uncertainties,” says Tom Kehoe, global head of research and communications at AIMA. “However, compared to last year, there is a higher degree of confidence fuelled by expected interest rate cuts and robust performance. The hedge fund industry is also witnessing a promising environment for new fund launches, indicating resilience and potential growth.”
The survey shows that confidence in the ability to raise capital increased by six percentage points compared to Q1, however, optimism about revenue generation, cost management, and overall fund performance slightly declined among respondents.
Middle Eastern hedge fund managers were the most optimistic about all three factors. In contrast, UK hedge fund managers were less positive about capital raising and overall performance, though the majority still saw these factors as confidence boosters.
Both large and small firms had similar views on the overall performance of their investment strategies, however, smaller hedge fund managers were more concerned about costs affecting their revenues. Additionally, capital raising posed a greater challenge for smaller firms, with a third citing it as a confidence drain, compared to only 20% of larger firms.
Confidence levelled dipped across all geographic locations, except for UK-based managers. AIMA says North American and APAC hedge fund managers showed the lowest confidence levels – the for former, confidence is at its lowest since Q4 2022, although some leading US stock markets hit record highs this quarter, most of these gains were driven primarily by a small but significant group of semi-conductor stocks and tech mega-caps.
Recently, concerns about the sustainability of this AI rally have grown, AIMA adds, noting that towards the end of the quarter, some market commentators noted that hedge funds and other investors were selling their technology holdings and shifting to financials and energy stocks to reduce their exposures. The overall confidence score among North American funds (+15) was dragged lower by a larger than normal percentage of Long-Short Equity and hedged equity strategies, which scored the lowest in confidence this quarter.
Elsewhere, APAC-based respondents reported mixed confidence levels. Hong Kong-based firms continued to show the lowest confidence (+13), affected by the high percentage of hedged equity funds. In contrast, Singapore-based funds reported among the highest confidence levels in APAC (+16,) driven by greater confidence in macro, multi-strategy, and digital asset funds, which scored +18 this quarter.
As mentioned, UK-based funds continue to score high levels of confidence (+18), AIMA observes that in contrast to events taking place in the US where the election outcome remains on a knife edge, the polls leading up to the UK election suggest the outcome to be far more certain. Other headwinds in the shape of higher interest rates for longer appear to be subsiding with firms expressing greater levels of confidence for the second half of the year.
Middle East-based funds continue to be the most bullish globally, with an average score of +19. The quarter witnessed further news of big-name hedge funds and alternative asset managers move to the UAE as the region underlines its position as one of the fastest growing jurisdictions for the fintech industry globally, AIMA says.
“This quarter’s HFCI report reveals a nuanced hedge fund landscape,” observes Muneer Khan, partner and Middle East regional head at Simmons & Simmons. “It’s clear that market unpredictability since COVID-19 continues to challenge the industry, with concerns over costs and capital raising emerging, especially for smaller firms, which further underscores the complex dynamics influencing hedge fund confidence. However, we’re pleased
to see Middle Eastern managers emerging as the most optimistic, reflecting a sector that, while facing challenges, continues to navigate the regional market with more confidence.”
Steve Nadel, partner at Seward & Kissel, adds, “It’s interesting that the HFCI data indicates an increase in confidence regarding capital raising for North American fund managers, yet overall confidence levels are down and specifically, significantly down for emerging managers. This aligns with what we’ve seen in the market – that fundraising continues to be challenging but less so for established managers.”