AIMA, in partnership with Simmons & Simmons and Seward and Kissel are pleased to present the Q4 2023 AIMA Hedge Fund Confidence Index (HFCI) providing a snapshot of fund managers confidence in their economic prospects of their business for the coming 12 months.
Based on a sample of 235 hedge funds (accounting for approx. US$2 trillion in assets under management) that participated in the industry poll taken throughout the week commencing 11th December, the average measure of confidence is +15.6, a decrease of six points from the previous quarter, and just below the average score of +17.7.
A regional analysis shows that North American respondents, dominated by US hedge funds, are the most confident going into 2024.
North American hedge funds top sentiment going into 2024
AIMA, in partnership with Simmons & Simmons and Seward and Kissel, are proud to present the 13th quarterly Hedge Fund Confidence Index (HFCI), which provides a snapshot of fund managers’ confidence in their economic prospects for the coming 12 months. A full time series of confidence levels since Q4 2020 can be found on the second to last page of this report.
Selecting the appropriate level of confidence, respondents are asked to choose from a range of -50 to +50, where +50 indicates the highest possible level of economic confidence for the firm over the next 12 months. When measuring their level of economic confidence, hedge fund respondents are asked to consider the following factors: 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).
Q4 2023 results
The Q4 2023 edition of the Hedge Fund Confidence Index (HFCI) surveyed 235 hedge fund firms worldwide, collectively managing approximately US$2 trillion in assets, over the week commencing the 11th December. The results show an average confidence level of +15.6, a decrease of six points from Q3, and just below the average score of +17.7.
In the third quarter, the confidence score was boosted by higher numbers from hedged equity and global macro managers. However, in Q4, these same strategies reported some of the lowest confidence scores of the year, contributing to the overall decline. Despite nearly all regions and strategies reporting a decline in confidence scores this quarter, almost 90% of those that polled recorded a positive confidence score.
Trend analysis - Q4 downturn pattern asserts itself
Our ongoing data collection through the Hedge Fund Confidence Index (HFCI) is forming an increasingly valuable time series, offering fresh perspectives on industry confidence trends. This expanding dataset has revealed a distinct pattern in confidence levels.
One such observation is the annual peak in confidence levels reported by hedge funds in the third quarter of each year only to be followed by a marked decrease in confidence in the fourth quarter.
Notably, the confidence score reported for this quarter is greater than the historical average for Q4, despite the sharp decline from Q3, see figure 2. Digging deeper into the data shows a rebound in confidence levels during the first and second quarters of the following year. This recurring pattern of recovery post-Q4 confidence lows suggests a dynamic and resilient confidence landscape in the hedge fund sector, signalling adaptability and optimism among industry participants.
This quarter’s results are notable for the wider-than-usual confidence score dispersion. Historically, the vast majority of confidence scores are clustered between +1 and +30, with an average of 87% of respondents scoring themselves in this range, see figure 12. This quarter, less than 80% of respondents fit in this range, with the remaining distributed on both tails. The other dominant observable trend is the greater-than-average representation of long-short equity funds, which historically reported lower confidence scores in Q4, compared to other strategies. This strategy accounts for 60% of respondents in this index, up from the quarterly average of 50%.
New insights: What’s driving confidence among hedge funds?
In a new development for the HFCI, we get under the hood to determine the dominant factor driving confidence among hedge funds this quarter.
The breakdown of these responses can be found below.
Breakdown by hedge fund location
The latest HFCI indicates a return to the mean for confidence across all regions both in terms of their 2023 confidence levels before Q3’s breakout scores and their Q4 average score since records began, in Q4 2020.
It must be noted upfront that this quarter’s HFCI analysis should be framed in the context of being significantly overweight in North American and UK respondents, and underweight APAC and EMEA (excl. UK) respondents, which will influence average confidence scores this time around.
UK hedge funds once again relinquished their lead over North America this quarter, with an almost 10-point drop off in confidence since Q3 to +12.7. This decline positions UK hedge funds below their Q4 average of +13.8. North American hedge funds, meanwhile, experienced a relatively mild decline, from +19.5 to +16.6, which remains above their Q4 average of +15.7.
Beyond the macro environment undoubtedly influencing sentiment on either side of the Atlantic, this reversal is partly due to, the UK’s dataset including 70% of respondents representing long-short equity managers (63% in North America). Digging deeper, North American respondents average a significantly higher AUM at US$11.2 billion, compared to the UK’s US$9.3 billion. This disparity might contribute to the relatively smaller decrease in confidence observed in North America, as larger fund managers typically report higher confidence levels than their smaller counterparts.
Despite these trends, UK hedge funds show slightly greater optimism than North America in several key areas: raising capital, generating revenue, managing costs, and overall fund performance. The greatest divergence between the UK and North America comes when considering their ability to raise capital. 86% of UK respondents said capital raising increases their confidence compared to 70% in the US, see figure 3.
Turning to APAC, the region’s average confidence score has, on the whole, remained resilient. The APAC dataset includes a much more diverse range of investment strategies including a small pocket of very confident digital assets, global macro, and multi-strategy fund managers that lifted the regional score.
APAC respondents reported the greatest confidence of any region in their ability to generate revenue and manage costs but interestingly were the least confident in their ability to raise capital. Going further, the data reveals that Hong Kong-based respondents are much less confident than their regional peers in their ability to raise capital and deliver for investors over the next 12 months, demonstrating the divergence currently taking place across APAC and compared to the relatively bullish mood in Singapore.
Breakdown by hedge fund AUM
Larger managers continue to show greater resiliency than their smaller peers resulting in their confidence gap widening slightly. The pool of smaller managers includes a wide variety of strategies with a greater range of confidence levels, including those at extremes of the spectrum. Almost all larger managers, dominated by long-short equity, and to a lesser extent global macro and multi-strategy fund managers are closely clustered in the cautiously optimistic bracket of +11 to +20 or thereabouts.
In the analysis of factors influencing the confidence scores of fund managers, smaller managers now exhibit a higher level of confidence in their ability to generate revenue and manage costs than larger managers, while larger managers are more comfortable with raising capital.
See the full report here.
