Hedge Fund Optimism Is Rising as Managers Deliver Their Best Performance in Years

Economic confidence among hedge fund managers is on the rise amid double-digit returns and increasing assets under management.

Jeenah Moon/Bloomberg

Jeenah Moon/Bloomberg

Hedge fund managers have grown even more optimistic about their business prospects over the next 12 months.

On a scale ranging from -50 to +50, hedge funds rated their economic confidence at +19.5, up from an average of +18.4 the previous quarter, according to the second quarter Hedge Fund Confidence Index from AIMA, Simmons & Simmons, and Seward & Kissel. Confidence is also up significantly from +13.8 in the fourth quarter, according to the index.

In a survey of more than 300 hedge funds around the world accounting for approximately $1 trillion in assets, respondents were asked to consider three factors for determining their outlook: “their firm’s ability to raise capital, their firm’s ability to generate revenue and manage costs, and the overall performance of their fund(s).”

Over 90 percent of the hedge funds reported “a positive confidence” for the next 12 months, buoyed by the rollout of Covid-19 vaccinations in the U.S. and U.K, and as investors grew hopeful about the pandemic’s end. All funds across regions expressed increased confidence from the previous quarter, with those in North America conveying it at highest level on average (+22.5), followed by those in the Asia-Pacific region (+18.2), and then those in Europe (including the U.K.), the Middle East, and Africa (+17.7).

Higher Returns Fuel Industry Growth

As of the end of May, hedge funds posted an average of double-digit returns, net of fees, in 2021, the report noted, citing HFR data. The HFR index showed the returns as the best year-to-date performance in the past 25 years.

From a strategy outlook, multi-strategy funds had the highest level of confidence at +22, amid receiving the bulk of capital from institutional investors; that was followed by long-short equity, long-short credit, and global macro funds, which each scored +18.8.

In terms of the best performing strategies, hedge funds in equity remained on top, owing to the “advantage of the market dislocation and volatility,” the report stated. Sectors that performed particularly well were biotech, healthcare, and technology — growing drivers for the industry.

Global macro strategies were also shown to benefit, particularly from their role in navigating inflation threats in the U.S. and U.K. “The accompanying volatility in equity and commodity prices is typically a good environment for macro funds to outperform,” the report said. “Increasingly investors are looking to the qualities that hedge funds demonstrate in being able to manage any downside risk from market volatility as well as the heterogeneity of their investment strategies which can provide the best potential for significant diversification as well as the highest potential for generating out-performance.”

In May alone, the global hedge fund industry grew by an estimated $41 billion with a total gain of $67 billion for the year thus far, according to the report.

Investors looking to gain exposure to digital assets and environmental, social, and governance strategies relied on hedge funds as an “effective route” toward those investments. The report noted that hedge fund participation in cryptocurrency markets will be “the catalyst for new investment strategies to be developed.”

Hedge Funds Report More Confidence With Remote Work

While there’s been an increase of fund managers returning to the office, particularly in parts of the U.S. and the Asia-Pacific region, most meetings are still being held virtually. And it’s working: “There is a greater level of confidence in the virtual outreach with examples of new businesses being successfully onboarded,” the report stated.

The environment for fund launches remains robust, especially for those partnering with previous investors and for multi-strategy and global macro funds. Fundraising for new managers is expected to remain challenging, with most investors relying on past relationships or a firm’s proven track record.

To be sure, the overarching optimism surrounding the industry doesn’t come without hurdles. Areas of issues, the report noted, are likely to arise from increased regulatory scrutiny, particularly in the U.S., Europe, and the U.K., as well as talent management and operational challenges amid a post-pandemic environment.