EY survey shows private equity is growing while hedge fund allocations decreased
Traditional hedge fund offerings are losing out to alternative asset classes, particularly private equity.
That’s the big takeaway from the 2019 EY Global Alternative Fund Survey which has found that overall allocations to alternative investments are largely unchanged but competition between asset classes is intensifying.
AUM allocations to hedge funds dropped 7% year-over-year while private equity gained 7%.
The shift means that asset managers have differing strategies with hedge funds focusing on talent and cost management amid dovish growth expectations; half are prioritizing cost management and rationalization compared to 29% of PE managers.
Meanwhile private equity fund managers are more bullish on growth and focusing on capital raising with some ambitious strategies.
Investors want something new
The survey also discovered that both hedge fund and PE managers are meeting demand from investors for new product offerings:
- Hedge funds offering or planning to offer co-investment vehicles more than doubled from 21% to 58% in the last year;
- Another 37% of hedge fund managers currently offer or plan to offer illiquid credit, private credit, CLOs and senior debt in fund structures;
- 17% of hedge fund managers currently offer or plan to offer real assets and infrastructure and 16% currently offer or plan to offer real estate;
- 41% of private equity managers are offering private credit vehicles;
- 23% of private equity managers are providing real estate products and 22% offering exposure to real estate.
However, more than three-quarters of hedge fund managers have been more successful increasing AUM in their existing offerings rather than in their new products; but more than half find success in launching new products.
One successful strategy is the launch of separately managed accounts (SMAs), for existing clients and new clients, with demand for these from investors continuing to grow.
In fact, 39% of hedge fund managers anticipate growth in the proportion of their firms' assets that will be included in SMAs in the next two years, as compared to their views of their comingled offerings, where 24% of managers expect future asset growth but 20% expect asset declines.
ESG is crucial
As we enter a new decade, the report shows that fund managers must diversify into ESG products with 29% of investors already investing socially responsible funds and 63% saying that managers’ ESG policies directly impact their investment decisions.
With just 19% of hedge fund managers currently offering ESG products, there is growth needed to meet investor demand.
Most private equity firms have adopted environmental and social responsibility policies (66% with another 8% planning to adopt), and while further behind, half of hedge funds have adopted or plan to adopt these policies.
"Investors of the next decade are more socially and environmentally conscious than they were in the last decade. They demand customization, transparency and accountability,” said Dave Racich, Partner, Ernst & Young LLP and Co-leader, EY Global Hedge Fund Services. “They also are more comfortable with and desire a number of offerings that years ago would have been considered non-traditional but are increasingly becoming more common as part of alternative managers' product arsenal. But, ultimately, they desire investments that will deliver strong returns. Managers able to heed these demands and diversify their offerings are poised to succeed."
Diversity lagging
The fund management industry has work to do on diversity within teams.
The report shows that just 30% of alternatives firms have set diversity targets and just 2% of all alternative fund managers report having a greater than 50% proportion of women employees in the front office.
Outside the front office, things have improved with 78% of private equity managers reporting that they have at least 30% of their back-office roles filled by women and half of hedge funds have 30% or more gender diversification.
"Increasing diversity is not only the right thing to do, it's strategic, as diversity in backgrounds is linked to supporting better investment decisions and more efficient business operations,” said Natalie Deak Jaros, Partner, Ernst & Young LLP and Co-leader, EY Global Hedge Fund Services and Co-leader, EY Americas Wealth & Asset Management Services. “The entire alternatives industry has a way to go to build a balanced workforce. The managers who accelerate progress are not only role models to the industry but are creating a competitive advantage."
The industry is not struggling to recruit younger talent but it does find retaining them challenging.
Addressing this issue means implementing more modern workplace practices such as improving office amenities (64% of managers), allowing relaxed dress codes (61%) and adding the flexibility to work from home (52%).
