Hedge fund managers haven’t felt as good about their business prospects since late 2020.
The Hedge Fund Confidence Index, designed by the Alternative Investment Management Association, rose to 25.4 in the third quarter of 2022. That’s the highest level since the launch of the HFCI in late 2020.
AIMA based the results on a survey of 389 hedge funds managing approximately $3 trillion in combined assets. The respondents were asked to indicate their confidence on a spectrum ranging from -50 to +50. The higher the score, the more confident they are about raising capital, delivering returns, and generating high profit margins.
Tom Kehoe, managing director at AIMA, attributed the rising confidence of hedge fund managers to their attractive return profiles. “From the beginning of the Covid-fueled turmoil to today, hedge funds have on average fared better than popular indices,” Kehoe wrote in an e-mail to II. “This year, some strategies are recording strong performance, while listed markets struggle.” According to the AIMA report, the average 60/40 portfolio has lost around 20 percent year to date. Meanwhile, hedge funds only lost an average of 4 percent to 6 percent.
The confidence level of managers differs across size, strategy, and geography. According to the AIMA report, hedge funds that manage more than $1 billion in assets finished nearly two points higher in their confidence scores than their smaller peers. It’s the third consecutive quarter in which larger funds are more certain about the future of their businesses.
Hedge fund strategies that have delivered outstanding returns in the current market have also demonstrated a higher confidence level. For example, managers that focus on global macro and managed futures strategies reported confidence scores of 28.5 and 28.9, respectively. “These are strategies that have traditionally performed well during similar market conditions,” Kehoe said.
Managers in the U.K. and Asia are more positive about their business prospects than those in North America. Eighteen percent of managers in the U.K. and 21 percent of managers in the Asia-Pacific region had a confidence score of over 30, according to the AIMA report. In comparison, only 14 percent of managers in North America scored above 30.
According to Kehoe, part of the reason that hedge funds in the U.S. are less optimistic is that they are facing more regulatory uncertainties. The Securities and Exchange Commission, for example, recently proposed new rules to regulate the private fund industry, which may require hedge fund managers to disclose their holdings more frequently.
“North American fund managers are facing a potentially significant overhaul of the regulator’s framework they operate in, although it’s as yet unclear what that will end up looking like,” Kehoe said.