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Hedge fund confidence remains high as recession fears grow

·4-min read

Consumer attitudes toward the economy are nearing recessionary levels. Corporate confidence in the economic outlook has fallen. And some of Wall Street's biggest names have warned of an imminent downturn.

All while the stock market just finished off its worst first half of a year since 1970.

But the hedge fund industry appears not to have gotten the memo that pessimism is in the air.

Confidence levels reported by the global hedge fund industry remained elevated in the second quarter, according to the Alternative Investment Management Association’s (AIMA) latest Hedge Fund Confidence Index.

The average measure of hedge fund confidence in Q2 stood at +17.8 on a scale of -50 to +50, based on AIMA’s index. The index — created in conjunction with law firms Simmons & Simmons and Seward & Kissel — measures confidence from hedge fund managers in the economic prospects for their business over the next 12 months.

The figure edged up from last quarter’s score and is only slightly lower than the same period last year, which saw confidence at “the highest it has been for many years,” AIMA reported.

Based on a sample of 360 hedge funds that participated in the survey, the average measure of confidence is +17.8, just under one point higher than the score reported in the first quarter of the year.
Based on a sample of 360 hedge funds that participated in the survey, the average measure of confidence is +17.8, just under one point higher than the score reported in the first quarter of the year.

The trade group’s index is based on responses from 360 hedge funds worldwide with approximately $2.3 trillion in assets under management. The survey asks investors to their firms' ability to raise capital, generate returns, manage costs, and generate revenue.

"As traditional asset classes come under increasing pressure from global macro factors from inflation to geo-political tension, hedge funds are coming to the fore to provide downside risk and uncorrelated returns for their investor," said Tom Kehoe, global head of research at AIMA.

The benchmark S&P 500 on Thursday capped the first half of 2022 down 20.6%, its worst performance since 1970. The Nasdaq logged its largest January-to-June percentage drop on record, and the Dow plunged 15.3% for the year-to-date through the final session of June for its worst first six months of the year since 1962.

In fixed income markets, the Fed's aggressive interest rate hikes sent yields soaring across the space.

Hedge funder Bill Ackman has been among those most vocal about the Fed's policy actions, calling for even more aggressive rate hikes from the central bank earlier this week.

Bill Ackman, CEO of Pershing Square Capital, speaks at the Wall Street Journal Digital Conference in Laguna Beach, California, U.S., October 17, 2017. REUTERS/Mike Blake
Bill Ackman, CEO of Pershing Square Capital, speaks at the Wall Street Journal Digital Conference in Laguna Beach, California, U.S., October 17, 2017. REUTERS/Mike Blake

Amid this market turmoil some high-profile hedge fund struggles have consistently drawn headlines.

Hedge fund Tiger Global Management, which gained prominence for the pace of its private tech investing in 2021, saw its year-to-date losses reach 52% earlier this month – a decline that led the firm to slash its management fees and create separate accounts to keep up with investor redemptions.

And Melvin Capital, the “villain” of 2021’s meme stock saga and previously one of the most successful hedge funds on Wall Street, shuttered its operations last month.

AIMA’s gauge of hedge fund sentiment also comes as other indicators suggest deepening pessimism about the economy among strategists and everyday Americans.

Earlier this week, the Conference Board’s latest reading on consumer confidence showed consumer expectations in June fell to their lowest level in nine years. The component of the report that measures consumers' short-term outlook for income growth, the job market, and overall business conditions, fell to 66.4, its lowest reading since March 2013.

Meanwhile, economists, analysts and Wall Street’s top financiers have increasingly conceded that the U.S. economy is headed towards a recession amid the Federal Reserve’s 75 basis point rate increase, persistent inflation levels and signs of weakening consumer spending.

The optimism among hedge funds comes not only in contrast with what many experts have said, but also as some prominent managers in the space get battered by the broader sell-off in markets.

Gabriel  Plotkin, CEO of Melvin Capital Management, is seen in a video framegrab as he testifies about investments and trading in GameStop during an entirely virtual hearing of the U.S. House of Representatives Committee on Financial Services entitled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide?”, in Washington, U.S., February 18, 2021.    House Committee on Financial Services/Handout via Reuters
Gabriel Plotkin, CEO of Melvin Capital Management, testifies before lawmakers on February 18, 2021. (House Committee on Financial Services/Handout via Reuters)

In AIMA’s survey, confidence levels varied by strategy and the success of their performance. The score was highest among CTAs (commodity trading advisor funds) at +26 and global macro vehicles, which attempt to profit from broad market swings related to large-scale economic and political events, at +20.5.

Both of these strategies recorded notable gains during the quarter, per AIMA.

“Fundraising among CTA managers is also aligned with their level of confidence, given the substantial inflows into those strategies thus far in 2022," Dan Bresler, Partner, Investment Management, Seward & Kissel said.

Meanwhile, cryptocurrency-focused hedge funds scored lowest at +5.5 amid a deepening rout in digital-asset markets that saw leading crypto hedge fund Three Arrows Capital succumb to liquidation.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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