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Hedge fund confidence at highest level “in many years” as industry enjoys renaissance among investors

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Hedge funds are in a buoyant mood heading into the second half of the year, boosted by impressive Q2 performances and increased capital inflows, according to a key industry confidence metric.

The latest Hedge Fund Confidence Index – published jointly by the Alternative Investment Management Association, Simmons & Simmons and Seward & Kissel – shows industry optimism continued to grow in the second quarter of 2021, having earlier surged 40 per cent in Q1.

The data shows hedge funds’ optimism for the coming 12 months is now at “the highest it has been for many years”, AIMA, Simmons & Simmons and Seward & Kissel observed.

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. 

Roughly 300 hedge funds, collectively managing some USD1 trillion in assets, are quizzed on their capital-raising, revenue-generation and cost-managing prospects, along with the overall performance outlook of their funds for 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.

Overall, hedge funds reported an average measure of confidence on their businesses’ economic prospects in the coming year of 19.51 in Q2, up from the 18.4 rating in Q1. Roughly half of all those polled gave a confidence score of between 11 and 20, while a further 30.8 per cent of managers reported a score of 21-30.

Hedge funds’ positive mood is being fuelled by healthy returns – the industry soared 10 per cent on average in the first half of 2021, its best H1 showing in more than two decades according to HFR – along with a brighter economic outlook amid successful Covid-19 vaccine rollouts in the US and UK, and the easing of lockdowns.

That, in turn, has bolstered the opportunity set, with market dislocation, equities and commodity price volatility, and inflation trends all throwing up investment themes and ideas for a range of strategies, the research noted.

Multi-strategy managers are the most confident, with a +22 rating, following by long/short equity (long/short equity (+18.8), long/short credit (+18.8), and global macro funds (+18.8).

Strong returns are also helping spark a hedge fund “renaissance” among allocators, the report said, with investors increasingly seeing hedge funds as “an effective route” to into cryptocurrencies and ESG-focused strategies.

The Q2 update reported strong inflows across the US, EMEA and APAC, with the US leading the way and APAC recording seven consecutive months of positive flows. In May alone, the global industry grew by an estimated USD41 billion, extending gains for the year of approximately USD67 billion.

“Increasingly investors are looking to the qualities that hedge funds demonstrate in being able to manage any downside risk from market volatility, as well as the heterogeneity of their investment strategies which can provide the best potential for significant diversification as well as the highest potential for generating outperformance,” the report added.

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