Hedge Fund Managers Report a Steep Decline in Confidence

North American managers had the lowest confidence score, due to the macro headwinds facing the region.

Illustration by II

Illustration by II

After an optimistic quarter, the confidence of hedge fund managers has dropped sharply.

According to AIMA’s fourth quarter hedge fund confidence index, the overall confidence score has fallen to 14.1, more than 10 points below the previous quarter and the lowest ever since the survey first launched in 2020.

“Hedge funds are not immune to what has happened in terms of the macroeconomic environment over the past year, with inflation levels being higher than they have been for many years,” said Tom Kehoe, global head of research and communications at AIMA. “The cost of managing the business has obviously become more challenging as well. So they’re not immune to what’s happening for all businesses.”

The survey, which was conducted in mid-December, tracked how confident managers felt about their overall business prospects. It found the decline in optimism was ubiquitous across regions, strategies, and fund sizes. The results for the latest quarter were based on 328 hedge funds with a total $2 trillion in assets. The score range was from negative 50 to positive 50, with the latter being the highest possible level of confidence.

North American managers reported the lowest level of confidence at 13.5, due largely to regulatory headwinds facing the industry. “In the U.S., 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,” AIMA stated with the results.

“When we started this confidence index, [North America] was far and away the most confident region and now it’s competing with APAC almost,” said Drew Nicol, an associate director at AIMA.“You might not necessarily consider [the two regions] being on par for confidence, but actually that’s now where they are.”

The highest confidence score — 14.9 — was seen in hedge funds operating in Europe, the Middle East, and Africa, thanks to the burgeoning financial hubs in the Middle East, which serve as attractive domiciles for alternative investment firms. The respondents surveyed in the region also held some of the biggest multi-billion-dollar global macro funds and were found to be the most confident in size and strategy.

Despite the overall drop in confidence, the fourth-quarter score of 14.1 is still in positive territory and is not that far below the average historical score of 18 points.

“The number this quarter is influenced by managers that are in the long-short equity space,” said Kehoe, who attributed the decline to the poor performance of the equity and bond markets.

The managers that reported the highest level of confidence were macro, managed futures, and multi-strategy firms.

“I’m particularly interested actually in the next index reading because there is a sense that in certain parts of the world inflation might be peaking,” said Kehoe. “Our sense is that we will then have greater clarity around the regulatory environment as well… So that’s one that we’re really looking out for, the Q1, because that could be the bellwether for the year ahead in terms of how firms are thinking about things.”