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Hedge fund confidence down in Q2

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Confidence among hedge fund managers dipped in the second quarter of the year, falling below the historical average as measured by AIMA’s Hedge Fund Confidence Index, although managers remain generally optimistic about the prospects for their businesses.

The index, which is produced in in collaboration with Simmons & Simmons and Seward and Kissel and assesses confidence in raising capital, generating revenue, managing costs, and overall fund performance, stood at 16.5 in Q2, down from 19 in Q1 and below the historical average of 17.7.

Smaller hedge fund managers reported a significant downturn in confidence, with their average score dropping from 18.9 to 13. Overall though, 92% of respondents maintained a positive confidence score, with 96% of larger fund managers expressing optimism, compared to 77% of smaller firms.

Long-short equity funds were the least confident group surveyed, according to AIMA’s survey, with managers struggling to regain confidence despite positive performance in major equity markets and ongoing expectations of interest rate cuts later this year.

“This quarter, hedge funds are treading more cautiously amid ongoing industry headwinds and geopolitical uncertainties,” said Tom Kehoe, global head of research and communications at AIMA. “However, compared to last year, there is a higher degree of confidence fueled by expected interest rate cuts and robust performance. The hedge fund industry is also witnessing a promising environment for new fund launches, indicating resilience and potential growth.”

The survey revealed a 6% increase in confidence in raising capital compared to Q1, but a slight decline in optimism about revenue generation, cost management, and overall fund performance. Middle Eastern hedge fund managers were the most optimistic, while UK-based managers were less positive about capital raising and overall performance but still saw these factors as confidence boosters.

Both large and small firms had similar views on their investment strategies’ overall performance, but smaller hedge fund managers were more concerned about costs impacting their revenues. Additionally, capital raising posed a greater challenge for smaller firms, with a third citing it as a confidence drain, compared to 20% of larger firms.

Confidence levels dipped across all regions except the UK. North American and APAC hedge fund managers showed the lowest confidence levels, with North America experiencing its lowest since Q4 2022. Despite record highs in some US stock markets, concerns about the sustainability of the AI rally have grown, with some investors shifting from technology to financials and energy stocks to reduce exposure. North American funds’ overall confidence was dragged down by a significant proportion of long-short equity strategies, which scored the lowest this quarter.

APAC respondents reported mixed confidence levels. Hong Kong-based firms showed the lowest confidence at +13, while Singapore-based funds reported among the highest in the region at +16, driven by greater confidence in macro, multi-strategy, and digital asset funds, which scored +18.

UK-based funds continued to score high levels of confidence at +18, with AIMA noting that the upcoming UK election appears to have a more certain outcome compared to the US. Other headwinds, such as prolonged high interest rates, seem to be subsiding, boosting firms’ confidence for the second half of the year.

Middle East-based funds were the most bullish globally, with an average score of +19. The region continues to attract big-name hedge funds and alternative asset managers to the UAE, underlining its status as one of the fastest-growing fintech hubs globally.

 

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