By Hugh Leask
Optimism among hedge funds has rebounded this year, with the Alternative Investment Management Association (AIMA)’s latest quarterly sentiment tracker showing the highest-ever Q1 confidence score as managers’ performance prospects and business outlook turns bullish for the year ahead.
The 14th quarterly Hedge Fund Confidence Index (HFCI), published by AIMA in partnership with Simmons & Simmons and Seward & Kissel, gauges the hedge fund industry’s economic outlook for the next 12 months, probing managers’ business sentiment across capital-raising, fund performance, and revenue generation activities, and cost-managing prospects for the year ahead.
The latest index surveyed roughly 180 hedge fund firms, collectively managing $900 billion in assets.
In the latest study, hedge funds put their current confidence level for the first quarter of 2024 at an average of +19 on a sliding scale from +50, the highest level of economic confidence, to -50, the lowest.
That Q1 score is up more than three points from the +15.6 average score recorded in the previous Q4 2023 report, chiming with longer-term trends that show first quarter sentiment tends to recover after fourth quarter lows. The latest Q1 level of +19 – which is also above the historical average of +17.8 – is also the highest of any Q1 score since the HFCI launched in late 2020, indicating a stronger-than-usual rebound in sentiment among hedge fund managers for the year ahead.
Size matters
According to AIMA, the optimism is driven predominantly by fund performance and firms’ ability to generate revenue in the coming 12 months. Some 85% of survey respondents said fund performance prospects increases their confidence, against just 15% who said fund performance was driving down their confidence, with those numbers rising to 92% versus 8% among smaller managers with under $1 billion in assets.
Elsewhere, 70% of managers said capital raising capability is a source of confidence for the year ahead, with 30% describing it as a drain on confidence.
The study also found that larger and smaller hedge funds’ confidence levels are converging for the first time since the HFCI launched. Hedge funds running more than $1 billion in assets registered an average confidence score for Q1 of 19.1, while smaller managers with less than $1 billion had a confidence score of 18.9. By comparison, the Q1 2023 report showed a gap of more than seven points between bigger and smaller managers.
The report said: “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.”
Regional splits
Delving deeper, the study noted that Asia-Pacific hedge funds expressed greater optimism than managers in other regions when it came to fund performance, cost management and capital-raising, with the latter two categories increasing confidence among 90% of respondents.
Among North American hedge funds, fund performance is the biggest confidence driver (93%), but that optimism tails off slightly when it comes to cost management and revenue generation (83%) and capital-raising (71%) prospects.
On the flipside, despite Dubai and Abu Dhabi emerging as a key hedge fund hubs in recent years and Middle East managers scoring high overall confidence levels, just 38% said capital raising is a source of increased confidence, while 54% concede that cost management is more challenging.
The latest report indicated that the hedge fund capital-raising and fund environment appears “increasingly favorable,” pointing to a number of recent high-profile fund launches in credit and multi-strategy, while greater regulatory clarity in the U.S. could also improve business confidence in the industry.
“Global hedge fund confidence is on the rise amid leading U.S. equity markets smashing through record highs towards the end of the first quarter as well as notable strong performances from leading stock market indices in Europe and Asia-Pacific,” the report observed, noting that the prospect of interest rate cuts this year could further boost stock 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,” the report concluded.
This article, “Hedge funds’ confidence rebounds as industry sentiment turns bullish in Q1” was originally published on April 16, 2024 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.
