Hedge funds give a vote of confidence

Darren Sinden

The Alternative Investment Management Association (AIMA), has partnered with two prominent law firms, the first being Simmons and Simmons and the second being Seward and Kissel to create a new hedge fund index. However, instead of tracking the performance of managers or investment styles, the new benchmark will track the level of confidence among hedge […]

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The Alternative Investment Management Association (AIMA), has partnered with two prominent law firms, the first being Simmons and Simmons and the second being Seward and Kissel to create a new hedge fund index.

However, instead of tracking the performance of managers or investment styles, the new benchmark will track the level of confidence among hedge fund managers themselves.

More specifically the AIMA Hedge Fund Confidence Index (HFCI) will track the level of confidence that hedge funds have in the prospects for their business over the next 12 months.

The index will be updated every quarter when participants will be asked to rank their confidence in a range between -50 and +50 where plus 50 equates to the highest possible level of confidence and -50 to the lowest level of confidence in the economic prospects for the business.

When assessing their confidence level hedge fund managers will be 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 or funds.

The index compilers surveyed 200 hedge funds from around the world in December and found an average confidence measure of 14 with more than 70 percent of the managers who responded returning a positive confidence score.

The managers with the highest confidence ratings were found in Northern and Latin America. This regional group had an overall confidence rating of 20 whilst managers located in EMEA and the UK posted a combined confidence score of just 10. Managers based in APAC returned an overall confidence score of 11.

There were also differences in confidence levels between managers of different sizes. Larger hedge funds those with more than USD 1.0 billion of asset under management had an overall confidence rating of 11. At the same time their smaller brethren, funds managing less than USD 1.0 billion had a combined confidence score of 17.

The higher sentiment score among smaller managers has been attributed to the outperformance of smaller fleeter footed funds during 2020 and that ability to outperform larger firms seems to be attracting new investment into smaller hedge funds. Recent research from specialist marketing firm Murano found that requests for boutique managers to asset allocators from end investors had increased by 20% in Q3 2020, compared to the same period in 2019.

The overall optimism in the hedge fund industry follows average returns (net of fees for the year) until the end of November of 9.0%. Those returns compare quite favourably with the performance of many old-economy equity indices in Europe and the US but look pretty pedestrian when compared to the 44.20% gains that the technology-focused Nasdaq 100 index has generated over 2020 to date.

Despite this hedge funds are described as being cautiously optimistic about the outlook for 2021 and conversations with asset allocators by the index compiler suggests that they will be “ reinforcing “ their interest in hedge funds and alternative investment strategies in 2021.

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