When focusing on the future, where do you look?

Authors

Ryan Munson

EY US Wealth and Asset Management Partner

Loves servicing the alternatives industry. A top-notch family man. Married to an EY alum with 3 children. Passionate about Buffalo Bills football.

Jun Li

EY Americas Wealth & Asset Management Co-leader and Ernst & Young LLP Financial Services Organization Tax Partner

Passionate about diversity and inclusiveness, mentoring and sponsorship. Loves beach vacations with family, relaxing with a good book and watching his young daughter win chess matches.

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.

9 minute read 13 Nov 2019

The alternative asset management industry must pivot strategies to focus on the future and make real-time adjustments that control that path. 

With more investors increasing allocations to private equity and other alternative asset classes largely at the expense of traditional hedge fund offerings, all alternative fund managers are examining their strategic priorities and focusing on how to develop products and prepare their business for a rapidly evolving future, according to the 2019 EY Global Alternative Fund Survey (pdf).

While sudden shifts are part of the market, so are the subtle trends that slowly gain momentum and over time become a working reality. Current trends include capital being re-deployed among alternative asset classes, expanded use of structures that are customized for specific investor needs, an embracing of non-traditional and hybrid product offerings, the influence of socially responsible products, the (needed) focus on diversity as part of a broader spotlight on talent management strategies and the ongoing quest to more advantageously harness the reach of technology and the promise of data. These trends have been ramping forward and are gaining increased market awareness. These are not a tsunami of issues, but rather, a wave of market change and ongoing pivot points that need to be vetted and will largely be the issues that shape those managers who will find success in the next decade.

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1

Chapter 1

Key strategic priorities

Allocations to alternatives remain robust, but investors are increasing their allocation of assets to favor private equity.

While the overall amount allocated to alternative investments hasn’t changed, investors are distributing capital away from hedge funds to other alternative asset classes, including private equity, real estate, private credit and infrastructure.  

Asset allocation

33%

of investors allocate to hedge funds and 25% of investors allocate to private equity.

Faced with intensifying competition from private equity and other alternative managers, and performance challenges that are increasingly resulting in fewer investor allocations, some hedge funds are using this pause in fundraising to go back to basics, and looking inwards to improve operations and optimize costs.

Top priority

69%

of hedge fund managers and 71% of private equity managers list asset growth as a top priority.

Meanwhile, private equity’s growth shows no signs of abating and private equity managers have every reason to be bullish - investors have already upped the amount of assets dedicated to private equity in the past year and private equity firms expect that trend to continue.

  • Three-in-four private equity managers that are raising a fund in 2020 expect that fund to be larger than the last one that they raised.
  • Private equity managers are instead focusing on strategic initiatives to support this growth.

More focus on middle and back-office

43

of private equity managers report a priority of enhancing middle and back-office processes and technology to support the explosive asset growth.

Managers and investors align on cost management and talent program priorities.

Cost management

76%

of investors feel cost management should be a top three priority. And 58% of investors want talent management to top their managers’ priority list.

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Chapter 2

Increased focus on diversification of products

Alternative fund managers continue to diversify products via co-investment vehicles, ESG products, SMAs, and more.

Hedge fund and private equity funds continue to diversify their product offerings via co-investment vehicles, illiquid credit, real assets and real estate. These products promote growth opportunities, but pose challenges from an operations, technology, talent, and investor acceptance perspective.

Co-investment vehicles

58%

of hedge fund managers are offering or planning to offer co-investment vehicles.

Illiquid/private credit products

37%

of hedge funds and 41% of private equity managers are offering an illiquid credit product.

Investing in socially responsible products is increasingly being embraced by the alternative fund management community.

Socially responsible funds

29%

of investors are already investing or planning to invest in socially responsible funds.

Despite upticks in socially responsible products, investors are generally more comfortable investing in well-established products. The majority (79%) of hedge fund managers have been more successful increasing AUM in their existing offerings rather than in their new products. 

Investors of the next decade are more comfortable with and desire a number of offerings that years ago would have been considered non-traditional.

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Chapter 3

The role of talent management programs in investment decisions

The entire alternatives industry has significant work to do in terms of front-office representation.

Given the impact that having the right people makes on positive investment returns, it makes sense that the number of investors interested in talent management jumped from 36% to 58% over the past year and the focus on succession planning nearly doubled (23% to 40%).

ESG

86%

of investors are already investing or planning to invest in socially responsible funds.

Retention

43%

of hedge fund managers rank retention as a top three priority.

Many managers are taking actions to improve diversity by recruiting from a broader range of colleges (48%); seeking candidates from non-traditional backgrounds (40%); establishing and increasing attractive family planning policies (39%); and establishing and increasing health/wellness policies (37%).

Private equity managers are significantly further ahead in setting diversity targets, although the industry as a whole has work to do. Only 30% of firms have set diversity targets.

  • Just under half (48%) of private equity firms have set diversity targets compared to 15% of hedge funds

Similarly, private equity firms have had more success attracting women and improving gender diversity, but there’s still work to be done.

  •  Just 2% of all alternative fund managers report to have greater than 50% proportion of women employees in the front office; nearly all managers have fewer than 30% of their front-office roles filled by women.
  •  Over half (53%) of private equity firms report to have 10-30% of women employees in the front office versus 35% of hedge fund managers.

Outside of the front office, private equity firms, in particular, have had more success attracting women. In fact, 78% of private equity managers have at least 30% of their back-office roles filled by women.

The alternatives industry continues to be an attractive place for younger individuals, and managers do not feel they have challenges in recruiting younger talent. But given their tendency to change jobs frequently, retaining young talent is proving to be a more significant challenge.

  •  To attract and retain young talent, managers are improving office amenities (64%); allowing relaxed dress codes (61%); and flexibility to work from home (52%);  among other  initiatives.
  •  Few (outside of the largest managers) have made changes to their organizations that require significant investment (e.g., improving their family leave or health and wellness policies). This may make it challenging for alternative managers to compete against other industries, many of which are specifically trying to recruit new talent by offering attractive benefit programs.
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Chapter 4

More focus on technology

Technology, seen as a means to boost productivity, continues to receive robust investments.

Hedge fund and private equity managers continue to make meaningful investments in technology across their organizations. Compliance and regulatory reporting systems top the list of places where alternative managers are investing given evolving regulations.

  • Behind compliance and regulatory reporting systems (58%), are portfolio management (53%), fund accounting (49%) and investor servicing (42%) technology solutions.
  • Even though fewer than 1-in-5 managers have been able to able to either cut headcount or limit their  run-rate expenditures as a result of their investments, the return from having more efficient and less  error prone processes is significant. 

Enhancing middle and back-office processes

51%

of hedge fund managers report success in enhancing middle and back-office processes and technology.

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Chapter 5

Leveraging data as a competitive advantage

Alternatives managers are utilizing data as a competitive advantage, and private equity firms are also catching up.

As managers increasingly face a reality where they have to find cost savings and efficiencies, the ability to better leverage data created internally will only increase; managers who do not do so will be at an increasing competitive disadvantage.

Despite the amount of data they generate and maintain internally, there are still many managers – particularly smaller organizations – that do not have a strategy for maximizing the utility of their own data. 

Data strategy

57%

of hedge funds report having a formal data strategy compared to only 44% of private equity managers reporting such a strategy.

Managers also lack dedicated resources for data management. At the largest organizations, data management is a full-time job. And, not surprisingly, given the amount and complexity of data, the biggest firms are much more likely to have a CIO/CTO overseeing data management strategy.

  •  Just 21% of the smallest firms (under $2bn) have a CIO/CTO.

Investors are creating pressure by expecting managers to embrace next gen data and artificial intelligence (AI).

  • Only 11% of investors think it’s not important for hedge fund managers to use next gen data and analytics tools to support the investment process.
  • And, even though the private equity industry is a bit slower to adopt these tools, two thirds of investors (62%) feel it is important for their private equity managers to utilize them. 

 

70% of hedge fund managers and 56% of private equity funds currently or plan on using alternative data to support their investment process.

Private equity managers have trailed their hedge fund peers in using next gen data and AI as part of the investment process. The gap is closing, as private equity firms are increasingly seeking out new data sources as part of their investment process.

With the proliferation of data comes concerns surrounding keeping the information safe and secure.

  •  Only 39% of investors are confident that alternative fund managers have adequate cybersecurity protocols in place, whereas the majority (82%) of fund managers feel they are extremely well prepared.

Summary

The 13th annual survey (formerly the EY Global Hedge Fund Survey) found that overall allocations to alternative investments haven’t changed, but the competition is intensifying between asset classes. Continuing a multi-year trend, assets under management (AUM) allocated to hedge funds decreased by 7%, while allocations to private equity increased by 7%.  The survey also identified expanded interest in private credit and real estate offerings. This shift in allocations has impacted the strategic priorities of alternative managers. Private equity managers have every  reason to enact ambitious capital raising strategies and continue to identify growth as their top priority. 

About this article

Authors

Ryan Munson

EY US Wealth and Asset Management Partner

Loves servicing the alternatives industry. A top-notch family man. Married to an EY alum with 3 children. Passionate about Buffalo Bills football.

Jun Li

EY Americas Wealth & Asset Management Co-leader and Ernst & Young LLP Financial Services Organization Tax Partner

Passionate about diversity and inclusiveness, mentoring and sponsorship. Loves beach vacations with family, relaxing with a good book and watching his young daughter win chess matches.

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.