Press release

24 Nov 2020 Singapore, SG

Alternative fund managers in Asia-Pacific must focus on the challenges of growth in a COVID-normal environment

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Sophia Mah

Media Relations Lead (Assurance, Tax, Strategy and Transactions, Growth Markets), Ernst & Young Solutions LLP

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  • 100% of alternative funds surveyed in Asia-Pacific reported impacts on their client relationships as a result of the COVID-19 pandemic 

  • Three-quarters of private equity respondents and 38% of hedge fund respondents noted the pandemic had a major impact on client relationships

  • Almost 90% of investors globally are asking their fund managers for environmental, social and governance (ESG) products

Despite extreme levels of market volatility, ongoing geopolitical tensions, increased trading volumes and disruption to society due to COVID-19, alternative fund managers in Asia-Pacific have persevered. Nonetheless, managers continue to face challenges in addressing important areas of focus including environmental, social and governance (ESG) products and diversity and inclusion (D&I), according to the 2020 EY Global Alternative Fund Survey — In times of change, does accelerated adaptation present obstacles or opportunities?

The 14th annual survey (formerly the EY Global Hedge Fund Survey) found that total allocations to alternative investments remain relatively stable; however, the competition between asset classes continues to intensify. Following a multiyear trend, global allocations to hedge funds shrunk again to just 23% in 2020, compared to 33% in 2019 and 40% in 2018. Investments in private equity and venture capital remained stable at 26%, while investments in private credit increased from 5% to 11% as many market participants anticipate COVID-19 initiating a credit cycle that may create opportunities for these managers. 

EY Asia-Pacific Wealth and Asset Management Leader, Elliott Shadforth, said: 

“Alternative fund managers in Asia-Pacific have displayed remarkable resilience in the face of the global pandemic, quickly adapting their operations to the remote working environment. While many fund managers in the region saw less than ideal performance in the first half of 2020, many are experiencing a stronger than expected second half. As we look ahead to 2021, fund managers must focus on tackling the challenges of growth in this COVID-normal environment.”

Alternative funds demonstrated resilience as they dealt with, and continue to grapple with, the fallout from the COVID-19 pandemic

Overall, the alternative fund industry rose to the occasion surrounding the pandemic in terms of investors’ expectations and managerial performance. However, all (100%) of the alternative fund managers surveyed in Asia-Pacific reported impacts on their client relationships as a result of COVID-19. Private equity managers may have borne a harder brunt of the crisis as 75% of respondents noted the pandemic had a major impact on client relationships, compared with only 38% of hedge fund managers in Asia-Pacific. Of those hedge funds dependent on overseas institutional allocations, almost two-thirds (61%) of managers reported that their relationships with US pension funds had been most adversely affected. 

Looking ahead, most alternative managers in Asia-Pacific still believe their way of fundraising will return to normal, while 34% of the private equity respondents and 27% of hedge funds recognize that remote working may bring permanent changes to how they market products with clients going forward.

Shadforth said: “Given everything that has transpired in 2020, it’s a testament to Asia-Pacific’s alternative fund industry that managers were able to quickly transform their operations, to minimize disruption to investor engagement and deliver performance during periods of extreme market volatility. These actions and results highlighted the value of alternatives in preserving and growing investor capital in the most challenging of markets.”

EY Asean Wealth & Asset Management Leader Mark Wightman noted that private equity funds in Southeast Asia appear to have fared better than hedge funds in fundraising and capital generation. 

“Particularly, venture capital investments in the digital and technology sectors, which have seen strong interest in Southeast Asia, India and China, have done well during the pandemic as remote working led to an acceleration in digital transformation. At the same time, credit and distressed debt have been gaining traction as well,” Wightman added. 

Alternative fund managers must determine a path forward for offering socially responsible products while better managing their internal ESG policies

Allocators are increasingly focused on ESG products and socially responsible investing, but also wish to partner with managers who prioritize their ESG policies. Globally, 88% of investors are regularly speaking with their fund managers on how ESG is incorporated into their investment-making decision.

While investment trends and client engagement on ESG across Asia-Pacific remain high, alternative funds have more work to do when it comes to resourcing for ESG at their organization. Less than half (46%) of respondents in the region said they have a dedicated individual responsible for managing ESG at their organization, well below the global industry where 80% of managers now say they have dedicated individuals responsible for ESG.

Wightman said: “If not for the global pandemic, it’s possible that 2020 would have been remembered as the year that ESG dominated headlines within the business and economic environment. Particularly in Southeast Asia, ESG has been an important consideration for investors, although companies continue to face challenges in measuring ESG outcomes.”

Talent management and diversity and inclusiveness remain a focus for alternative fund managers

As managers face a more remote workforce, the foremost concerns for hedge funds and private equity are the relationships they have with their employees. Talent retention is the number one priority for 83% of private equity firms and 55% of hedge funds in Asia-Pacific. Managers are also concerned with employee productivity, deterioration in firm culture and difficulty in training their teams going forward.

While awareness of diversity and inclusiveness is important, there’s significant room for growth across the region – especially when it comes to formalizing D&I policies. A quarter of Asia-Pacific’s hedge fund managers (27%) and private equity managers (25%) have only an informal D&I policy in place, while the majority have no formal D&I policy whatsoever (67% and 58% respectively).  

Shadforth said: “There are a number of reasons that diversity at alternative fund managers is critical, but investor behavior and expectations are near the top of the list. Now is the time for alternative fund managers to step up and critically examine how they are thinking about talent attraction, development and retention to ensure a more diverse workforce. The experiences and knowledge from these individuals will prove to be fruitful in generating new ideas that ultimately benefit the manager and its investors.”

The complete survey is available at ey.com/altssurvey.

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About the EY Global Alternative Fund Survey

The purpose of this study is to record the views and opinions of Alternative fund managers and institutional investors globally. Managers and investors were asked to comment on the impact of COVID-19 on the industry and other pertinent industry trends. Specific topics included the shift to remote work; strategic priorities; ESG; fundraising, new product development; technology advancements; the changing talent management landscape; cost management; and future views on the industry. From July to September 2020, Greenwich Associates conducted 110 interviews globally with hedge funds representing over US$1.8 trillion in assets under management and 127 interviews globally with private equity firms representing nearly US$2.7 trillion in assets under management, and 73 interviews globally with institutional investors (funds of funds, pension funds, endowments and foundations) representing over US$1.4 trillion in assets under management.