- Survey finds the alternative funds industry has deftly navigated pandemic-related disruption and uncertainties, and firms are now looking at how they are pivoting toward proactive transformation.
- Over half (51%) of investors surveyed report increasing value delivered by alternative fund managers in the last two to three years, with investors overwhelmingly indicating that alternative products met or exceeded their return expectations.
- Increasingly, alternative fund investors are factoring environmental, social and governance (ESG) into investment decisions, with 75% saying their scrutiny of managers’ ESG policies has increased in the past two to three years.
- Digital assets became an area of focus during 2021, and while current exposures to cryptocurrency among most managers remain small, one in four managers expect their exposures to increase.
EY today announced the publication of its 2021 EY Global Alternative Fund Survey, which offers a comprehensive overview of the perspectives from alternative fund managers and the institutional investors who allocate to these asset classes. The 15th annual survey shed light on the topics that will be transforming the industry for years to come, including investors’ improved perception of alternative funds; the growing importance of ESG and diversity, equity and inclusion (DEI) considerations; and the industry’s view on product and strategy expansion into areas such as digital assets and an increased desire for exposure to private markets.
“Beyond reflecting on how alternative fund managers and their investors addressed the ongoing challenges posed by COVID-19, this research highlights the resilience of our industry and the key transformations that managers and investors are partnering to affect,” said Natalie Deak Jaros, EY Global Hedge Fund Co-leader and Americas Wealth & Asset Management Co-leader. “2021 was a year in which the industry invested to build significant momentum around various initiatives that will pay dividends for years to come.”
Across the survey’s findings, changing investor priorities, perceptions and expectations of alternative funds rang through, with key pillars of the results including:
2021 was a year where the industry embraced new and evolving investment opportunities and themes, leading to increased investment in the alternative fund space.
- Digital assets have become a mainstream trend, with the rise in popularity attracting the attention of alternative fund managers and investors. While only 1 in 10 managers reported having current exposure to cryptocurrencies, one in four hedge funds expect to increase their exposure in the coming year. The special-purpose acquisition company (SPAC) market was a similar phenomenon during the year, garnering the attention of retail and institutional investors alike. Alternative fund managers responded, as 37% of hedge fund and 28% of private equity managers indicated they participate or are considering participating in some capacity in SPACs. Additionally, public-private crossover funds continued to grow as more traditional liquid hedge fund managers looked to participate in attractive private market opportunities that have been fueling growth and interest within the private equity space for years. Forty percent of hedge fund managers indicated they have the ability and are participating in private market opportunities.
Funds are transforming strategies and products to fit the changing profile and needs of investors.
- Investor perceptions of value for alternative investments have risen, with more than half (51%) surveyed saying that the value provided by alternative fund managers has improved relative to a few years ago. This perception has been built by strong alternative fund performance in the face of market and geopolitical uncertainties and being nimble and willing to customize product and strategy offerings, with 46% of managers saying that one of their top strategic priorities is to expand products and strategies. Along with this strong performance, 42% of alternative fund managers are seeking growth by turning to retail channels, which is changing the investor profile for the industry.
A focused ESG strategy is critical to longevity.
- Alternative fund investors are increasing their incorporation of ESG factors into investment decisions, with 75% saying their scrutiny of managers’ ESG policies has increased in the past two to three years. This increased attention can be to the benefit of managers that prioritize ESG and to the detriment of those that do not. To this point, 39% of investors reported that they have either passed on investing in a manager due to insufficient ESG adoption or required the manager to make meaningful improvements to their ESG policies. Four in five investors say climate risk is a top ESG factor in their investment decision-making, with a majority indicating that it is one of the areas of increased focus this year.
The “war on talent” hits the alternative fund space.
- While discussions around how to recruit and retain top talent are considerations across industries, alternative fund managers are recognizing that they need to create a flexible, inclusive and diverse working environment. Talent management was the No. 1 overall business priority for the upcoming year, with two in three managers identifying this issue as a critical area of focus. Nearly two-thirds of managers have experienced increased scrutiny of their DEI initiatives, indicating the industry is recognizing that diversity yields better investment outcomes. Fund managers reported meaningful diversity in their back offices but continue to be challenged in the front office. Less than 1 in 10 hedge funds and only 2 in 10 private equity managers reported having a front office that was comprised 30% or more females, with significantly less composition from underrepresented minorities.
“The wealth of topics covered in this report — from the ways that ESG considerations are becoming crucial to a fund’s future to how a diverse team and strong talent management is increasingly tied to performance — shows the alternatives funds space is in a time of transformation,” said Jun Li, EY Americas Wealth & Asset Management Co-leader. “This report provides an overview of where the industry is today and creates a road map for the themes that will continue to dominate industry conversations in the years to come.”
Based on conversations with 210 managers and 54 investors, this report sheds light on today’s alternative fund landscape, as well as how emerging trends may shape the future. Specifically, this research contains deep dives on all of the above topics and others, such as the impact of retail on alternatives, relocation strategies, alignment of interests between managers and investors, and the use of technology.
The complete survey is available at ey.com/altssurvey.
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About the EY Global Alternative Fund and Investor 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 their future and strategies for the decade ahead. Specific topics included industry trends; talent management and diversity; ESG risks and investments; investment strategies; and future views on the industry. From July to September 2021, Greenwich Associates conducted 107 interviews with hedge funds representing over US$1.2t in AUM and 103 interviews with private equity firms representing nearly US$2.7t in AUM, and 54 interviews with institutional investors (funds of funds, pension funds, endowments and foundations) representing approximately US$1t in assets under management.