Hedge Fund Managers' Confidence in Their Funds' Economic Scenario

When judging the hedge funds through the back-of-the-envelope calculation of outsized returns, analysts typically rely on sources like Eurekahedge and Citco. Despite that, hedge fund managers' confidence in their funds' economic scenario over next [...]

Despite the weak performance numbers from sources like Eurekahedge and Citco, hedge fund managers generally report being confident about their funds' economic prospects over the next 12 months. Soaring inflation and the geopolitical turmoil hovering over Europe right now aren't taking a bite out of hedge fund confidence either. 

   Pedestrians along Wall Street near the New York Stock Exchange (NYSE) in New York, U.S., on Monday, ... [+] June 27, 2022. Money managers betting on a sustained global rebound will be left sorely disappointed in the second half of this crushing year as a protracted bear market looms, even if inflation cools. Photographer: Michael Nagle/Bloomberg 
  © 2022 Bloomberg Finance LP
On Monday, June 27, 2022, in New York, U.S., money managers betting on a sustained global rebound will be left sorely disappointed as a protracted bear market looms even if inflation cools.

In May, Eurekahedge reported that hedge funds fell by -.57% on an equal-weighted basis and 0.32% on an asset-weighted basis for reporting hedge funds. The performance of the hedge funds was driven by rising interest rates, which fanned concerns about a possible recession. Meanwhile, Citco's administration of hedge funds returned -1.1%.

The survey's background

The Alternative Investment Management Association (AIMA) has released its new Hedge Fund Confidence Index, which measures the level of confidence

AIMA asks survey participants to choose a number between -50 and +50, with +50 representing the highest level of economic confidence in their firm over the next 12 months. When they are considering where they fall on that scale, hedge fund respondents are asked to consider three factors. They are the ability of their firm to raise capital, its ability to generate revenue and manage costs, and its overall performance.

The survey was conducted among a group of people.

AIMA reports that the majority of respondents are in North America (32%), followed by Europe, the Middle East, and Africa (38%) and finally Asia Pacific (30%).

The largest percentage of hedge funds surveyed, at 22%, managed between $1 billion and $4.9 billion in assets. About 16% of the hedge funds managed $5 billion to $9 billion, and about 12% managed over $20 billion. Two categories, $500 million to $999 million and , each accounted for around 11% of the funds surveyed.

The four remaining size categories were allocated the following percentages: from about 10% for funds between $10 billion and $19.9 billion to less than 2% for funds with $51 million to $100 million.

The company's performance in the second quarter

In the second quarter of 2018, AIMA took a sample of 360 hedge funds and found the average measure of confidence in their economic prospects to be +17.8. That reading was almost one point higher than the confidence level recorded by AIMA in the first quarter.

The organization noted that the market volatility increased alongside geopolitical tensions in Ukraine during the second quarter. The quarter also brought renewed regulatory challenges, particularly for private funds industry in the U.S..

Despite the concerns, more than 85% of the hedge funds that participated in AIMA's quarterly index expressed confidence in their business's economic prospects over the next 12 months, compared to the last 12 months.

About 48% of funds rated their confidence between 21 and 30, while one-quarter delivered a rating between 11 and 20. More than 8% rated their confidence between 31 and 40, while about 2% gave a rating between 41 and 49.

At the other end of the spectrum, about 1% each gave ratings between -49 and -40 and between -39 and -30. Only 13.4% were negative in their assessment of economic confidence, while 86.6% had some degree of positivity.

Size and location can contribute to confidence

The smallest funds (with less than $1 billion in assets under management) rated their confidence level at +14.5, with the highest percentage of respondents giving scores between 21 and 30, at 39%. The biggest funds (with more than $1 billion in assets under management) scored their confidence level at +20. Once again, the highest percentage gave a score between 21 and 30, at over 50%.

In the second quarter of 2018, all regions showed higher confidence levels than in the first quarter. This was a complete reversal from the first-quarter report, when two of three regions reported lower confidence scores.

Hedge funds in the U.K. continue to surprise to the upside, with the average confidence score being above +20 for the second straight quarter after three of the last four quarters saw that level. APAC and North American fund managers are also more confident now than they were in Q1, but U.K. fund managers are more confident than those from these two regions.

Funds that utilize global macro, CTA, multi-strategy and long/ short credit strategies are particularly confident when U.K. funds take part in the survey. On the other hand, North American funds from less confident long/ short equity funds had an average score of +5.5 when participating in the survey with digital asset funds negatively impacting APAC's score 

Overall, funds in the EMEA region had an average score of +20.8, while funds in the U.K. averaged a score of +21.03. Funds from North America recorded a confidence score of +16.4, and funds from APAC reported a lower one of +15.6

Overall, hedge funds are optimistic

Despite the choppy returns from most hedge funds and hedge fund indices, such as Eurekahedge and Citco, fund managers generally remain confident about their prospects. However, the reported confidence level varies widely by strategy, skewing the results.

The economic and geopolitical challenges that the market is facing right now include the war in Ukraine, inflation levels at 40-year highs, and monetary policy tightening. Increased regulatory and compliance demands would also be anticipated to have an adverse effect on hedge fund manager confidence.

To investigate the strategy-based skewness in its results, AIMA examined the hedge fund strategies that it polled. As expected, CTA and global macro funds reported the highest confidence scores: +26 and +20.5, respectively. Both strategies have produced high returns for their investors so far this year.

In contrast, crypto hedge funds reported the lowest confidence level at +5.5. This is not surprising because of the challenging conditions in the crypto markets this year.

The hedge fund industry is facing a barrage of new regulations, especially in the U.S., where many proposals have been introduced. If these are implemented, it will become extremely difficult and costly to run private hedge funds in this country.

Every week, the Securities and Exchange Commission (SEC) puts forth a new proposal. The organization described the headwinds as "the most serious overhaul of existing market practices for the private funds industry." Hedge funds in Europe and the APAC region are also having to consider large numbers of new industry regulations under discussion.

Despite the many challenges that hedge funds face, fund managers are cautiously optimistic about their economic prospects for the next year. Following sharp corrections in global financial markets and expectations of higher volatility, fund managers are reinforcing their value proposition by better managing downside risk and offering financial security to their investors.

Jones, who wrote this article, is a reporter for Business Endeavor.