Alternative funds organization foresees hedge fund industry optimism in 2021 - 15 April 2021

Increased industry optimism has been driven partly by a perceived light at the end of the tunnel regarding the COVID-19 pandemic as well as a more predictable presidential administration in the U.S.

The Alternative Investment Management Association (AIMA) has released its Hedge Fund Confidence Index (HFCI) for the first quarter of 2021. The HFCI indicates a high level of confidence in the hedge fund industry for the next 12 months. According to the survey, both large and small hedge funds expressed high levels of confidence, with large funds being the most confident.

Survey. Over 300 hedge funds participated in the HFCI survey, representing approximately $1 trillion in assets. Respondents were asked to choose from a range of -50 to +50, where +50 indicates the highest possible level of economic confidence for the hedge fund firm over the next 12 months and -50 indicating the lowest confidence. To evaluate their level of economic confidence, the survey’s respondents were asked to consider their firm’s ability to raise capital, generate revenue, and manage costs, as well as the overall performance of their fund.

Survey results. The average measure of confidence among funds surveyed was +18, which was an almost 40 percent increase in the confidence level reported by hedge funds from the previous quarter. Over 90 percent of funds cited a positive measure in their responses. Also in contrast to the previous quarter, which showed a wide regional dispersion in confidence scores, the latest HFCI indicates that hedge funds expressed similar confidence regionally. North America-based hedge funds had the highest level confidence rating with an average of +20. Europe, Mideast, and Africa (EMEA) funds and Asia-Pacific (APAC) funds both scored an average of +17, while funds based in the U.K. expressed confidence levels of +16.

The survey also measured confidence by fund size. Both larger funds (those that manage greater than $1 billion in assets) and smaller funds (those that manage $1 billion or less) expressed high levels of confidence with scores of +19 and +17 respectively. Larger funds made up 54 percent of the responders to the survey. These high levels of confidence continue to increase despite the short-lived incidences involving GameStop and Archegos, the report noted. It also remarked that there is a "cautious optimism" that the worst of the COVID-19 pandemic is behind us with availability of multiple vaccines and pandemic restrictions being slowly lifted.

Investment strategy and sector strategy were also factors examined in the survey. Long/short equity funds remain among the best performing investment strategies, while sector specialist strategies focusing on biotech, healthcare, and technology have also seen good returns in the past 12 months. According to the report detailing the survey results, some hedge funds have benefited from the increase in the popularity for special purpose acquisition companies (SPACs). The continued strong performance of the hedge fund industry has not gone unnoticed by investors, who are increasingly looking at hedge funds to manage risks of market volatility and to deliver better returns than other asset classes.

The report also stated that the positivity in the market is reflected in the post-survey interviews conducted with managers and industry stakeholders. The hedge fund industry is "tiptoeing back to normal" with vaccination rollouts and more workers returning to the office. Some of the more popular hedge funds that have launched recently include specialist sector equity strategies, macro funds, special purpose vehicles, closed-end products, and SPACs.

APAC in particular is leading the global effort in unlocking pandemic restrictions, including the resumption of international travel, leading to increased activity in that region. The report advises that APAC-based funds are predicting new capital investment for investors who seek out opportunities in China and emerging markets. A series of corporate governance changes in Japan and South Korea have also led to new investment opportunities in those countries.

The report concludes that hedge funds are riding a "wave of optimism sweeping the globe" as the world moves closer to exiting the COVID-19 pandemic. According to AIMA’s Tom Kehoe, "reasons for the industry to be cheerful include a continued strong appetite among investors for hedge funds while the pipeline for new fund launches remains resilient."

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