North American Hedge Fund Managers Begin to Sour on Their Business Prospects

The results of AIMA’s latest confidence index come as investors contend with inflation, rising interest rates, and war in Ukraine.

Gabby Jones/Bloomberg

Gabby Jones/Bloomberg

Hedge fund managers in North America and the Asia Pacific region are losing confidence in their future business opportunities, despite the current market environment being a relatively favorable time for many of their strategies to shine.

That’s one insight from the Alternative Investment Management Association’s Hedge Fund Confidence Index. The index, measured during the last two weeks of the quarter, is a gauge of hedge funds’ sentiment about their economic prospects over the next 12 months. The 300 global hedge firms that participated in the index indicated their confidence on a spectrum ranging from - 50 to + 50.

In the U.S. and Canada, hedge funds’ confidence level was down 42 percent from its peak during the second quarter of 2021. In Asia, hedge funds’ bullishness about their businesses dropped only 19 percent during the same time period. But the confidence level of hedge fund managers in both North America and Asia has declined steadily for the last three quarters.

The results of the latest confidence index come as investors contend with the bite of inflation, rising interest rates, war in Ukraine, and climbing energy prices. Although hedge funds can be popular options during turbulent times, few asset managers welcome downturns in general.

Still, when looked at on a global basis, 90 percent of hedge funds are confident about their business prospects for the next 12 months, according to the most recent index. The average confidence score reached +17 in the last two weeks of March, up a small amount from the fourth quarter, according to AIMA. Those statistics, however, were skewed by hedge funds in the U.K., who were quite bullish and which represented 47 percent of respondents. (Twenty-seven percent of respondents are in North America, with 23 percent in Asia.) In the U.K., hedge fund managers confidence scores went up between the fourth quarter of 2021 and the first quarter of 2022. In addition, U.K. hedge funds reported a confidence level above +20 for the second time in three quarters.

“Despite greater market turbulence, increasing geopolitical tensions around the war in Ukraine as well as a renewed set of regulatory challenges in particular for the private funds industry, confidence levels reported by hedge funds remain resilient,” said Tom Kehoe, AIMA’s global head of research, commenting on the results from all managers. Yet he noted that it might take another quarter for the hedge fund industry to “digest these challenges.”

Not surprisingly, given the rising costs of compliance, operations and other infrastructure, larger funds were far more certain about the future of their businesses than their smaller peers. The average confidence score of funds with more than $1 billion in assets under management was +17.7, compared to +15 reported by funds with less than $1 billion in assets, according to the association. During the fourth quarter of 2021, smaller funds’ confidence was only slightly higher, coming in at 15.7.

Some of the prevailing optimism clearly comes down to performance. Managers of global macro — take Haidar Jupiter Fund for example — and multi-strategy funds like AQR had high returns last year and into 2022. As for the confidence index, these managers each reported average scores of +19 and +18, respectively.