Does accelerating adaptation present obstacles — or increase opportunities?

Alternatives outperform relative to expectations during COVID-19

Investors generally felt that their managers outperformed their performance expectations during COVID-19, especially in private equity, where a ratio of 4:1 felt their managers outperformed expectations. Hedge fund performance varied by strategy, but on average almost all significantly exceeded major benchmarks. When major indices were down 15%–20% in early 2020, many hedge funds were only down low single digits. Funds demonstrated their value in preserving capital in the downturn while opportunistically stepping in to capitalize on market dislocations.

Client service was largely “business as usual” for the alternatives industry during the COVID-19 market turmoil

Investors generally felt that managers went above and beyond to be responsive to their questions and provided more frequent updates on the business and performance during the height of the turmoil. In fact, only a small percentage of investors felt their managers did not meet their client service needs during this period.

Marketing and investor relations is the least automated functional area

Managers (particularly private equity managers) admit that most functions involve more manual processes than perhaps are necessary. Fund accounting and middle office are the most advanced functions where for years managers have invested to streamline timely and accurate reporting. However, the marketing and investor relations functions have largely maintained their status quo as a manual-intensive process. Although a high touch personal experience is needed, that experience can be enhanced by technology and meaningful investor reporting.

Alternative managers have the opportunity to invest in technology to better meet their clients’ needs

Given the lack of automation that managers stated for their marketing and investor relations function, it is not surprising that the majority of investors stated there is a need for increased digital infrastructure from their managers. Nearly two-thirds of investors believe an investment in this area would be beneficial to the future relationship. Investors felt that hedge funds have made better progress, with 39% of investors stating that their digital infrastructure was highly advanced, while only 34% said the same of private equity.

Asset growth remains the top priority for alternative fund managers

Asset growth, for the third year in a row, continues to be the top priority for both private equity and hedge fund managers. This is unsurprising, as rising costs and fee pressure have made asset growth imperative for managers looking to counteract these forces.

Investors maintain large alternatives portfolios, but shifts are occurring within asset classes

The total allocation by investors to alternatives remains relatively unchanged over the last several years, with between 20% and 25% of their overall portfolios allocated to alternatives. However, the composition of that allocation continues to change.

COVID-19 provides boost in interest in active management

A shift in alternative products is not the only change we are seeing play out. Hedge fund managers expect that COVID-19 market volatility will drive a significant increased interest in active management. Over half of hedge fund managers surveyed believe the impact of COVID-19 and the related market volatility will increase investor interest in active management. This trend is more pronounced with the largest hedge fund managers, those with over $10 billion in assets under management, where over 75% responded that COVID-19 will increase interest in active management.

Alternative managers continue to offer a variety of products

Our previous survey results have indicated ambitions for managers to expand their offerings outside of their core areas of expertise. 2020 reflects consistent results, where we continue to see the blurring of lines differentiating hedge and private equity managers.

Alternative managers are not keeping pace with demand for ESG products

Socially responsible investing continues to prove to be a promising avenue for growth. Almost half of investors are currently investing in ESG products, which is almost double the number of investors including ESG products in their portfolios in 2019. Investors are placing a significant emphasis on managers’ ESG policies when deciding whether to invest with a manager. Nearly all investors (88%) ask managers how ESG is incorporated into their investment decision-making.

More investors are being required to invest in ESG products

Over the past year, the percentage of investors required to invest in ESG products has nearly doubled, and that figure is expected to nearly double again in the next two years.

Hedge fund and private equity managers are taking very different approaches to talent management

Despite facing many of the same issues when it comes to hiring and retaining top talent, hedge fund and private equity managers are taking vastly different approaches to their talent management strategies.

More than half of all private equity managers surveyed said that increasing gender and ethnic minority representation is a top priority. For hedge fund managers, improving employee productivity continues to be a top priority in 2020.

Partial remote working is expected to become new normal

Alternative fund managers expect approximately one-third of employees to work remotely even after conditions normalize post COVID. Many managers cited that they are reducing their office space and plan on having a dedicated workforce to be on a permanent work-from-home schedule, while others determined they will be implementing a permanent rotating schedule for employees.

Investors see hedge funds as more technologically proficient

As technology continues to evolve and has become even more critical in a COVID-19 environment, investors are reasonably satisfied with their managers’ efforts to embrace technology and data. Hedge funds in particular were reviewed favorably, as over half of investors surveyed felt that the hedge fund industry was ahead of the curve from a technology perspective relative to other financial services. This reflects hedge funds’ prompt adoption of data and technology, largely to support portfolio activities but more recently as mechanisms to evaluate their overall business operations and engagement with allocators.

Varying degrees of automation within operations

While investors may be satisfied with their managers’ implementation of technology, there is certainly room for improvement when it comes to the automation of various functions. Investors and other constituents expect that manual processes can and should be phased out. Advancements in technology offerings, whether internally developed or from service providers, have made it possible for managers of all strategies to automate all areas of their business. This will result in more efficient and timely processing and reporting while demonstrating the appropriate commitment to a digital infrastructure that investors are coming to expect.