A new report from EY has highlighted an improved perception of alternative funds with returns that meet or exceed the expectations of investors.
The 15th EY Global Alternative Fund Survey found that the value provided by alternative fund managers was considered better or significantly better than two to three years ago by 51 per cent of institutional investors and was in line with expectations for a further 45 per cent.
Within the alternative asset classes, hedge funds have recorded the biggest improvement in investor expectations over the past year.
Thirty-seven per cent of investors said that hedge funds had outperformed their return expectations in the past 12 months compared with only 14 per cent in the past three to five years.
EY said the perception improvements were linked to the strong performance of alternative funds in the face of recent market and geopolitical uncertainties.
“Beyond reflecting on how alternative fund managers and their investors addressed the ongoing challenges posed by COVID-19, this research highlights the resilience of our industry and the key transformations that managers and investors are partnering to affect,” said EY global hedge fund co-leader Natalie Deak Jaros.
She added, “2021 was a year in which the industry invested to build significant momentum around various initiatives that will pay dividends for years to come.”
Rebound in allocations to hedge funds
Overall alternative investment allocations from institutional investors have remained flat in recent years between 22-24 per cent according to EY, however there has been a significant shift within the alternative segments.
Hedge funds received 28 per cent of alternative investment allocations after multiple years in decline, putting it roughly on par with private equity on 27 per cent.
This is in contrast to 2018, where allocations to hedge funds (40 per cent) were more than double those for private equity (18 per cent).
Real estate received 24 per cent of alternative investment allocations, followed by 9 per cent for credit, 6 per cent for real assets and infrastructure and 5 per cent for other asset classes.
While only 10 per cent of hedge funds currently have exposure to cryptocurrencies, 26 per cent expect to increase their exposure in the next one to two years.
Greater scrutiny of ESG and diversity
EY also highlighted the rising importance of ESG and diversity expectations within the industry.
Three quarters of investors have increased their scrutiny of the ESG policies of managers in the past two to three years and 65 per cent have increased their scrutiny of diversity, equity and inclusion.
Just 8 per cent of hedge funds and 22 per cent of private equity managers reported that more than 30 per cent of their front office was female, with an even lower proportion reported in regard to under-represented minorities.
Sixty-four per cent of alternative fund managers ranked talent management as one of their top three long-term strategic priorities, followed by 46 for product and strategy expansion and 44 per cent for ESG initiatives and offerings.
“The wealth of topics covered in this report – from the ways that ESG considerations are becoming crucial to a fund’s future to how a diverse team and strong talent management is increasingly tied to performance – shows the alternatives funds space is in a time of transformation,” said EY Americas wealth and asset management co-leader Jun Li.
“This report provides an overview of where the industry is today and creates a road map for the themes that will continue to dominate industry conversations in the years to come.”
