Hedge fund confidence is soaring as strong Q1 gains boost AIMA sentiment index

Soaring eagle

Hedge funds are growing in confidence following a positive start to the year, according to the Alternative Investment Management Association’s latest quarterly Hedge Fund Confidence Index.

The benchmark, devised by AIMA alongside Simmons & Simmons and Seward & Kissel, has revealed a surge in industry optimism during the first quarter of 2021, amid strengthening investor appetite, a resilient new launch pipeline, and sustained positive performance.

The AIMA Hedge Fund Confidence Index (HFCI) is a quarterly measure of hedge fund firms’ confidence in the economic prospects of their business over the next 12 months.

Managers are asked to consider their capital-raising ability, revenue-generation and cost-managing prospects, and the overall performance of their funds over the coming year. They then score their confidence levels on a scale of +50 (the highest level of economic confidence) to -50 (the lowest), with 0 indicating a neutral level of confidence.

Based on a sample of more than 300 hedge funds globally, collectively managing some USD1 trillion in assets, the average measure of confidence in the latest quarterly tracker stands at +18, a 40 per cent surge on the previous quarter.

Long/short equity, event driven funds, CTAs and managed futures funds registered the highest confidence following a strong three-month period.

The report suggests the Covid-19 vaccine roll-out and easing of restrictions underpin a “cautious optimism” that the worst of the pandemic is over, while the upheaval surrounding GameStop and Archegos ultimately proved short-lived, strengthening sentiment further.

AIMA said more than 90 per cent of all funds reporting to the Q1 index cited a positive confidence measure, in contrast to a “wide dispersion” in sentiment scores reported in Q4 last year.

“Prospects for the hedge fund industry are as strong as they have been in several years with the industry returning another solid set of results in the first three months of this year,” the report observed.

“As of the end of March, hedge funds on average returned 6 per cent net of fees for the year. Performance dispersion remains prominent with some hedge funds continuing to deliver exceptionally strong returns.”

The HFCI metrics show both large and small hedge funds’ confidence is on the up: larger firms with more than USD1 billion stands at +19, while smaller firms running less than USD1 billion have a confidence rating of +17.

Geographically, meanwhile, North America-based managers are the most confident, with an average confidence rating of +20, with EMEA and APAC based funds scoring +17 on average, up 70 per cent and 58 per cent respectively from Q4 2020.  Hedge funds in the UK also express markedly higher confidence levels of +16, a rise of 60 per cent on Q4 2020 levels.

The report added that the continued strong performance by the industry “has not gone unnoticed” among allocators.

“The strong investor sentiment highlighted in the Q4 2020 confidence index has translated to the industry reporting an estimated USD24 billion in net inflows in the first two months of this year, making it the best two months start since 2014,” the study added.

“Increasingly investors are looking to the qualities of hedge funds to best manage any downside risk from market volatility and deliver on performance better than most asset classes. In a further boon to industry prospects, with yields for some fixed income strategies becoming more challenging, investors are turning to hedge funds as a replacement, given their ability to deliver higher returns.”