North America leads hedge funds confidence despite quarterly decrease

Index reveals confidence drop was led by hedged equity and global macro managers.

Hedge funds are preparing to face the challenges of continued macroeconomic factors, uncertainty, and market volatility, having ended 2023 with positive sentiment, led by North American managers.

A global measure of confidence among hedge funds managing around US $2 trillion in assets by the Alternative Investment Management Association produced a score of +15.6 in the fourth quarter, down six points from the previous quarter.

AIMA’s Hedge Fund Confidence Index, produced in collaboration with law firms Simmons & Simmons and Seward and Kissel, ranks industry confidence based on responses on a scale ranging from +50 (highest possible) to -50 (lowest possible) economic prospects for their business over the next 12 months, considering 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).

The fourth-quarter score was impacted by a decrease in confidence among hedged equity and global macro managers who has reported increased sentiment in the third quarter.

However, the dip should be taken in context of the historical trend in the HCFI, which has typically seen peak confidence in the third quarter followed by decline. The score for the fourth quarter was also higher than the historical average for the quarter and overall, 90% of respondents recorded a positive confidence score.

AIMA global head of research and communications Tom Kehoe said that given the underlying uncertainty and risk of radical change in the regulatory and economic environments hedge funds operate in, the more tempered average confidence scores are understandable.

“Early indications from data providers show that, on average, hedge funds are likely to report better returns in 2023 than in 2022, reinforcing their value to investors as protectors of wealth. Overall, almost all of the hedge funds gave a positive confidence score for their economic prospects for the coming 12 months.”

While confidence is highest among hedge funds in North America, the report also highlights that larger funds tend to have higher confidence levels globally, while one of the most diverse ranges of sentiment scores of any HFCI to date underscores the lack of consensus among managers pursuing different investment strategies with some global macro and multi-strategy firms thriving, while hedged equity-focused strategies strike a more modest tone.

ALLOCATING TO ALTS

With the potential for volatility in equity and fixed income markets in 2024, there is a strong prospect of hedge funds allocating to alternatives for diversification and protection against downside risk.

However, Nicholas Miller, partner at Seward & Kissel, noted that equities remain a strong choice for many fund managers in the United States.

“In the U.S., while there is significant uncertainty caused by the SEC’s new private fund adviser rules that has a dampening effect on confidence, we have seen a marked uptick in large allocations, especially into equities strategies,” he said. “The primary recipients of these large allocations have been our larger clients, although we have seen an increase for more modestly sized managers as well. Over time, we expect to see higher confidence scores as a result.”