Why Hedge Fund Managers Are Worried About the Rest of 2023

AIMA’s quarterly Hedge Fund Confidence Index revealed a decline in investor sentiment.


Illustration by II

Hedge fund managers are losing confidence in their economic prospects for the remainder of 2023, new data showed.

According to the Alternative Investment Management Association’s quarterly Hedge Fund Confidence Index, the average measure of confidence dropped by 2.1 points quarter-over-quarter.

The average measure of confidence, which managers score on a scale ranging from +50 to –50 was 14.2 according to AIMA. The industry group polled 408 hedge fund managers with $3.3 trillion in assets during the week of June 23. The historic average has been 17.5.

So why the drop? According to AIMA, ongoing macro and geopolitical concerns, coupled with regulatory uncertainty for U.S.-based funds, drove hedge fund managers’ confidence south.

“The macroeconomic uncertainty that dominated the narrative in [the first quarter] continues,” the report said. “Stubbornly high inflation levels (especially in the U.K.) and noises from central banks that they may hike rates further are adding to the melee of factors impacting confidence levels among hedge funds.”

Beyond the overall drop in confidence, the survey revealed some trends among managers. For instance, managers of funds of funds displayed the highest level of confidence, clocking in at 19.18. Managers of long-short strategies were the least confident in the market conditions to come, scoring 13.56.

Meanwhile, larger managers — those with more than $1 billion in assets under management — remain more confident than their smaller peers, with an average confidence score of 15 this quarter. However, that dropped by four points quarter-over-quarter.

Smaller funds stayed steadier, moving from 11.1 in the first quarter to 11.8 during the second.

“We would argue that larger managers (as a measure of AUM) are more equipped to deal with some of the operational issues (including managing the business in a higher cost environment) also being faced by their smaller manager peers,” wrote Tom Kehoe, global head of research and communications at AIMA, in an email. “Further given their AUM size (and in some cases the strategy they pursue), investors may be more likely to allocate to them over their smaller peers, all things (including performance) being equal.”

Confidence diverged across geographies, the survey showed. North America was the quarter’s most confident region, with a flat score of 16.7 quarter-over-quarter.

These funds remain confident against the backdrop of an uncertain regulatory environment, according to Kehoe. Over the past two years, the private funds adviser proposal has dogged managers with questions and a lack of long-term clarity over how Gary Gensler, chair of the Securities and Exchange Commission, will ultimately handle the proposal.

“Under Gensler’s leadership, the commission has issued dozens of proposed rules (including the private funds advisers proposal) over the past two years which if passed will significantly impact markets, market participants, and investors, particularly the funds industry,” Kehoe wrote in the email.

That said, it’s not as though managers abroad don’t have concerns of their own. The Asia-Pacific region in particular reported its lowest score on record — 9.4. That score doesn’t tell the full story though — Japanese and Singapore-based managers reported relatively high scores, but Hong Kong-based investors dragged down the score.

Almost half of the Hong Kong-based respondents reported a score of 0 or negative confidence. AIMA noted that this is likely due to the lengthy COVID-19 lockdown in the region, as well as geopolitical concerns.

Despite this, AIMA noted that Hong Kong-based investors have reason for optimism: International travel, as well as local commerce, are bouncing back.

As for managers globally, the report said, “Despite the gloomy environment, hedge funds may have some reason for cautious optimism. With signs pointing to a more divergent monetary policy from central banks globally in the second half of the year, this could present more trading opportunities for hedge funds with the resultant next HFCI potentially revealing a more positive pattern for the industry than that reported in the first half of this year.”