Can the difference of one year move you years ahead? Can the difference of one year move you years ahead?

Authors
Jessica Bloom

Partner, Wealth and Asset Management, Ernst & Young LLP

A problem solver, that aims to continuously drive positive change. Energized by finding practical and thoughtful solutions to complex problems. Loves new experiences and exploring with her family.

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.

Natalie Deak Jaros

EY Americas Wealth & Asset Management Co-leader and WAM Assurance Leader

Passionate about servicing the industry and community. Celebrates D&I and promotes the recognition of high performing women in the industry. Loves spending time with her husband and two daughters.

Jun Li

EY Americas Wealth & Asset Management Co-leader

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.

10 minute read 22 Nov 2021

The 2021 Global Alternative Fund Survey reveals managers need to advance investor priorities as their perceptions of value are evolving.

In brief
  • In 2021 alternative funds increase the successful momentum they built in 2020 by delivering strong returns resulting in increased investor confidence.
  • Alternative fund managers advance investor environmental and societal priorities and work to attract, support and retain a diverse and decentralized workforce.
  • Managers turn to retail, family office and HNW individuals to increase capital, while investors demand better financial and nonfinancial reporting.

There’s no escaping the fact that the effects of the COVID-19 pandemic are still impacting the 2021 investment landscape. The experiences, hardships and requirements of the pandemic continue to prompt alternative asset management firms around the globe to review and adjust their priorities, operations and goals to increase solvency and build prosperity in the face of rapid, ongoing change.  If one were to write a story about the alternative fund industry in 2021, it would detail the continuing successful momentum the industry was building in 2020, with alternatives thriving, meeting investor expectations and performing; at the same time, investors, faced with persistent market volatility and business uncertainty, continue to embrace the value of alternative funds to diversify their investment portfolios, mitigate risk and future-proof their returns.

Most of us are familiar with the phrase “the future is now,” but what does the expression really mean? In 2021, alternative fund managers are defining the term and applying it by using foresight to envision the future today. They’re visualizing how events might unfold towards a particular outcome — in this case, successfully extending their ability to predict and leverage the next wave of investment opportunities — while forecasting and preparing for a future colored by higher investor standards, increased regulatory scrutiny, and workforce and operational challenges.

Alternative fund managers have realized they need to not only address but advance current and future investor priorities, which now extend to retail investors as well, regarding environmental and societal imperatives, while taking the necessary steps to attract, support and retain a diverse and decentralized workforce. They’re making critical changes to investment strategies and product mix, including increasing exposure to digital assets, while implementing new talent acquisition and retention policies, employing new digital infrastructures and IT capabilities, and capitalizing on current environmental, societal and marketplace shifts to help guide their investment direction now and well into the future.

businessman presenting the new plan to his colleagues
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1

Chapter 1

Alternative funds continue to perform and deliver

Allocations to PE and hedge funds are now on par as managers turn to “retail,” family office and HNW individuals to increase capital.

Allocations to hedge funds rebounded and are now on par with private equity

Throughout 2021 the alternative fund industry has proven its ability to weather economic volatility and manage risk while producing returns that meet or exceed investor expectations.  Although private equity has continued to outpace investor expectations by a wide margin, hedge funds’ actively managed strategies proved attractive to investors, helping them to end several years of mixed performance and outperform investor expectations.  As such, allocations to hedge funds (28%) and private equity (27%) are now on par — a stark contrast to 2018 when hedge fund allocations (40%) outpaced private equity (18%) by a two to one margin, and in 2020, when private equity fund allocations (26%) exceeded hedge funds (23%).

Managers seeking growth are turning to “retail” channels as institutional allocations remain flat

Capital raising continues to be a priority, with two in five managers turning their focus to wealth management and retail channels for growth. Managers, looking to broaden their LP base, given limitations that institutional investors may have on additional flows to alternatives, are identifying retail, High-Net-Worth and Family Office investors to be favorable segments for raising assets.

Seeking new growth opportunities

42%

of managers are turning to “retail” channels to seek growth as institutional allocations remain flat.

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Chapter 2

Talent management and DEI policies are in the spotlight

Managers’ diversity, equity and inclusion policies are under increased investor scrutiny, while hybrid work becomes a permanent feature.

Investor scrutiny on managers’ DEI policies is increasing

Alternative fund managers have recognized that effectively managing talent and incorporating diversity, equity and inclusion (DEI) policies and programs into both corporate governance and investment strategies are a core business imperative. With investor scrutiny increasing, managers that can successfully attract and retain talent and operationalize and take DEI to the next level, can realize increased investor interest and growth. It’s worth noting that this increased investor scrutiny may be due in part to recognition that effective diversity policies yield better investment outcomes, and that investors are being held accountable for fostering diversity by their own stakeholders, i.e., boards and shareholders for corporate funds, and public entities.

DEI policies are now a business imperative

65%

of investors are placing greater importance on managers’ DEI policies in their investment decisions.

Hybrid work will remain a permanent feature of the future work environment

In 2021 “the war on talent,” or the ability to attract and retain workers, may be one of the greatest challenges facing the alternative fund industry today.  Employees, who worked remotely during the pandemic, having experienced an improved work-life balance and other benefits associated with working from home, have an advantage when it comes to choosing who they will work for, and how, when and where they will work.  In response, alternative fund managers recognize that they need to create an attractive, flexible, safe and inclusive working environment that maximizes employee productivity.  Hybrid work plans, offering some of the flexibility that working from home offers, achieve the desired result, and will become a permanent feature of the future work environment.

mature man sitting at table in front of lush garden writing
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Chapter 3

The rise of ESG risk integration and sustainable investments

Managers, under increased investor scrutiny, integrate ESG risk and sustainability products across their corporate policies and portfolios.

An increasing proportion of investors are investing in ESG products

In 2021, with environmental and social justice issues dominating the news cycle, the environmental, social, and governance (ESG) movement has taken “center stage,” with alternative fund managers formalizing their ESG policies at both the management company-level and in their investment strategies to satisfy investor demands. These demands include investing in companies that actively incorporate sustainable practices into their corporate strategy planning and disclosure efforts and investing in companies that offer sustainable products.

The growing importance of ESG products

39%

of investors are currently invested in ESG products – an increase from 33% in 2020.

One in five investors say they decided not to invest with a manager because their ESG policies were inadequate

Although most managers are providing their ESG policies and procedures upon request, investors want increased transparency in reporting to demonstrate that their managers are meeting their UN Conference of the Parties (COP) ESG requirements. In response, managers point to a lack of quality data as one roadblock to adoption — but adopt they must, for in the past year, one in five investors decided not to invest with managers without appropriate policies, citing inadequate ESG integration as a primary reason for their decision. As a result, managers who neglect this trend may lose out on investor interest and capital allocations.

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Chapter 4

Alternative investment strategy innovations and developments

Investment opportunities include crossover public/private funds, a surge in SPACs, and increased institutional embrace of digital assets.

Nearly 30% of alternative fund managers participated in the SPAC market

Perhaps the most pronounced of the strategy innovations during 2021 has been the increased focus on private investing, with hedge funds making private company investments to enhance returns and attract capital, with investors becoming comfortable with this strategy as well. Private investment opportunities have been significant contributors to performance during 2021 while also providing a diversified return profile against public market investing.   

In addition, alternative fund managers have been active participants in the SPAC market, with one in three actively engaged or considering sponsoring or investing in a SPAC, as evidenced by the Q1 surge in activity.

One in four hedge fund managers expect to increase crypto exposure

Cryptocurrencies and the digital asset ecosystem perhaps garnered the most mainstream public interest during 2021.  Alternative fund managers have become more active participants, drawn by uncorrelated return profiles and continued investment in institutional-grade infrastructure to support this evolving asset class. 

The evolving asset class

22%

of investors are expected to increase exposure to crypto-related assets in the next one to two years.

young woman relaxing in a wild meadow listening to music on headphones
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Chapter 5

The future alternative investment fund landscape

Data and technology improvements, sustainable investing and the impact of retail investors shape the future of the alternative fund industry.

Besides sustainable investing, improvements to data and technology will shape the future of asset management

In 2021 and beyond, investors will continue to embrace the value of alternative funds to diversify their investment portfolios, mitigate risk and future-proof their returns. But deficiencies in digital infrastructures and IT capabilities still exist, impairing increased investor reporting requirements surrounding both financial and nonfinancial imperatives.  More than one in three managers surveyed point to improvements in data and technology as important in shaping the industry going forward. Managers increasingly need to invest in technology, while data engineering and data science professionals are essential resources in evaluating, collating, processing, and interpreting data from a myriad of sources to drive intelligent investment decision-making.

The future of asset management

36%

of managers see improving data and technology capabilities as important drivers in shaping the future of asset management.

Nearly half of hedge fund managers are paying closer attention to the impact of retail investors

In addition, nearly half of the hedge fund managers interviewed and 60% of managers in the US say they are more cognizant of retail investor behavior and its impact.  In response, managers have taken a variety of steps, including modifying their risk management procedures and setting exposure limits, investing in social media monitoring tools, and carefully examining how they express their investment propositions. In some circumstances, in addition to more careful monitoring of concentrated positions, managers have altered trading behavior to reflect short positions with derivatives rather than physical securities to avoid both public reporting of exposures and limit risk in periods of volatility.

Summary

In 2021, alternative fund managers successfully took advantage of the rapidly changing investment landscape by understanding and acting on the reality that their future success depended not only on their ability to predict and secure new investment opportunities, but on their ability to predict, prepare for and meet higher investor standards. These requisites included increased integration of ESG risks and sustainable products into their investment strategies, taking necessary actions to attract and retain talent, promoting a diverse, equitable, inclusive, and flexible work environment, and providing enhanced investor reporting to increase transparency of their financial and nonfinancial performance. 

About this article

Authors
Jessica Bloom

Partner, Wealth and Asset Management, Ernst & Young LLP

A problem solver, that aims to continuously drive positive change. Energized by finding practical and thoughtful solutions to complex problems. Loves new experiences and exploring with her family.

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.

Natalie Deak Jaros

EY Americas Wealth & Asset Management Co-leader and WAM Assurance Leader

Passionate about servicing the industry and community. Celebrates D&I and promotes the recognition of high performing women in the industry. Loves spending time with her husband and two daughters.

Jun Li

EY Americas Wealth & Asset Management Co-leader

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.