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November 13, 2020 at 01:53 PM
Private equity, real estate and private credit are winning investor allocations, while hedge funds are losing them. That, in a nutshell, was a key finding of EY’s annual global alternative fund survey, released this week.
Related: Why It’s Time to Rethink the 60/40 Blend
Total allocations to alternative investments remain relatively unchanged year over year, but the competition between asset classes continued to intensify. Following a multiyear trend, allocations to hedge funds shrunk to just 23% in 2020, compared with 33% in 2019 and 40% in 2018.
Meanwhile, investments in private equity and venture capital held steady at 26%, while investments in private credit increased from 5% in 2019 to 11% as many market participants anticipate that the coronavirus pandemic will initiate a credit cycle, creating opportunities for these managers.
Allocations to real estate increased to 26% from 23% last year.
For this year’s survey, Greenwich Associates conducted interviews from July to September with 110 hedge funds representing over $1.8 trillion in assets under management, 127 interviews with private equity firms representing nearly $2.7 trillion in assets and 73 interviews with institutional investors representing more than $1.4 trillion in assets under management.
The EY survey also found that hedge funds have been expanding their offerings, or tapping into new markets, such as private asset classes in particular, via a variety of unique structures.
Two in five hedge fund managers are currently offering co-investment vehicles or best-idea portfolios, and one in five are creating side pockets that allow investors an election to participate in illiquid investments within a broader portfolio.
Special-purpose acquisition companies came into their own last year, EY reported, with a nearly threefold increase in the amount raised in SPACs compared to 2019.
It noted that managers have found these types of permanent capital structures an attractive way to raise capital, acquire companies and fast-track them toward the public markets.
Pandemic Fallout
The survey found that the alternative funds industry met investors’ expectations and managerial performance during the market volatility that resulted from the coronavirus crisis, with 58% of hedge fund investors and 81% of private equity allocators nodding approval.
Not only that, nine in 10 investors said their managers had met or exceeded client service expectations across risk management, business updates and investor reporting.
Eighty percent of allocators said the remote environment had caused little or no disruption to the engagement and due diligence of existing and prospective manager relationships.
For their part, alts managers said they expected 32% of their back- and middle-office professionals to continue working remotely after conditions normalize, as well as 28% of front-office professionals.
The coronavirus has accelerated many of the digital trends of recent years that have become critically important for alternative managers, EY reported.
