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Alt Fund Managers Reveal Investment Plans for 2022: EY Survey

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The alternative funds industry has deftly navigated pandemic-related disruption and uncertainties, and firms are now considering issues that will transform the sector for years to come, according to a survey released Monday by EY.

The research demonstrates the alternative industry’s resilience and the key transformations managers and investors are partnering to bring about, Natalie Deak Jaros, co-leader of EY Global Hedge Fund and assurance leader at Americas Wealth & Asset Management, said in a statement.

“2021 was a year in which the industry invested to build significant momentum around various initiatives that will pay dividends for years to come,” she said.

From July to September, Greenwich Associates conducted interviews with 107 hedge funds representing $1.2 trillion in assets under management, 103 private equity firms representing nearly $2.7 trillion and 54 institutional investors with approximately $1 trillion in assets under management.

Embracing New Investment Themes

The survey found that the industry embraced new and evolving investment opportunities and themes in 2021, leading to increased investment in the alternative fund space.

Digital assets have attracted the attention of alternative fund managers and investors. While only one in 10 managers reported having current exposure to cryptocurrencies, a quarter of hedge funds said they expect to increase their exposure in the coming year.

The special-purpose acquisition company market also caught the attention of retail and institutional investors this year. Thirty-seven percent of hedge fund and 28% of private equity managers said they participate or are considering participating in some capacity in SPACs.

In addition, 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.

Meeting Investors’ Needs

According to the survey findings, investor perceptions of value for alternative investments have risen, with 51% of those surveyed saying that the value provided by alternative fund managers has improved relative to a few years ago. 

This perception is based on strong alternative fund performance in the face of market and geopolitical uncertainties, as well as on managers’ nimbleness and willingness to customize product and strategy offerings.

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Forty-six percent of managers said one of their top strategic priorities is to expand products and strategies. Along with robust performance, 42% of alternative fund managers said they are seeking growth by turning to retail channels — a trend that is changing the investor profile for the industry, EY noted.

ESG Strategy Critical to Longevity

Alternative fund investors in the survey said they are increasing their incorporation of environmental, societal and governance factors into their investment decisions.

Three-quarters of respondents reported that their scrutiny of managers’ ESG policies has increased in the past two to three years. EY said this increased attention can benefit managers that prioritize ESG and be a detriment to those that do not.

To this point, 39% of investors reported that they have either passed on investing in a manager because of insufficient ESG adoption or required the manager to make meaningful improvements to their ESG policies. 

Four in five investors said climate risk is a top ESG factor in their investment decision-making; a majority indicated that it is one of the areas they will increase focus on this year. 

Talent Management

Recruiting and retaining top talent are considerations across industries. For their part, alternative fund managers are recognizing that they need to create a flexible, inclusive and diverse working environment. 

The survey found that talent management is the alternative industry’s No. 1 overall business priority for the upcoming year, with two-thirds of managers identifying this issue as a critical area of focus. 

A similar proportion of managers reported that they have experienced increased scrutiny of their diversity, equity and inclusion initiatives. EY said this indicates that 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, according to the survey. Less than a tenth of hedge funds and only a fifth of private equity managers reported that their front office comprised 30% or more women, with significantly fewer underrepresented minorities.

(Image: Adobe Stock)