Fund managers and investors remain optimistic about market performance despite challenges
The alternative funds market has shown resilience this year despite the obvious challenges.
Fund managers met, or in many cases exceeded, the expectations of investors according to the 2020 EY Global Alternative Fund Survey, the 14th survey of its kind conducted by the ‘big 4’ services firm.
There was little change to allocations to alternatives compared to 2019 but competition between asset classes intensified.
Allocations to hedge funds continued a multiyear trend of reduction, falling to just 23% in 2020, compared to 33% in 2019 and 40% in 2018.
There was no change in allocations to private equity (26%) while allocations to private credit more than doubled from 5% to 11% amid expectation of opportunities for these managers resulting from the pandemic.
Hedge funds have been expanding into new assets and markets. Co-investment vehicles or best-idea portfolios are currently offered by more than 40% of hedge fund managers and almost 20% of managers are creating side pockets, which allow investors an election to participate in illiquid investments within a broader portfolio.
SPACs have also seen strong growth, with the amount raised up almost threefold year-over-year.
Active management, ETF gains
Market volatility due to the pandemic is likely to increase demand for active management according to more than half of the hedge fund managers surveyed, with 30% of investors saying that this is the case for them already.
Focus on ESG is a key trend in the alternatives industry.
Almost half of investors (49%) said they are currently investing in ESG products, up from just 26% in 2019; and 70% said that an alternative manager’s internal ESG policy is critically important in investment decisions.
"Much of the initial historical progress we've seen from an ESG standpoint has been outside of the US, but with increased investor demand for these products and for their managers to be good corporate citizens, we believe this is a tipping point moment where all managers irrespective of geographic location will step up to address this issue," said Natalie Deak Jaros, EY Americas Wealth & Asset Management (WAM) Co-Leader and WAM Assurance Leader. "We are seeing some response to these expectations, particularly with the emergence of ESG frameworks and scoring, as well as broader inclusion of ESG risks into the investing process."
Diversity in hiring
Another key focus for alternatives managers is hiring a diverse workforce.
More than half of managers reported that increasing representation of ethnic minorities is a priority and most investors consider diversity as a consideration in investment decisions; 69% believe increased diversity leads to positive performance.
"As this year's survey shows, most investors feel that their own organizations are more diverse than their fund managers', and virtually all (96%) investors want to allocate more to female- and minority-led firms,” said Dave Racich, Partner, Ernst & Young LLP and Co-leader, EY Global Hedge Fund Services. “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."
