EY Survey: Hedge funds now a smaller slice of the private markets pie

Accounting firm Ernst & Young is shedding more light on the multi-year trend of hedge funds making up a smaller slice of the alts pie in its 14th annual survey. The asset dip should not come as a surprise to anyone who has been following the hedge fund arena over the last few years. The Ernst & Young Annual Hedge Fund Survey though is now called the EY Global Alternative Fund Survey, reflecting investors and managers continued shift away from hedge funds. Investors are allocating the same amount of their portfolios to alternatives year-over-year, but allocations continue to shift as private equity (26% of allocators' alternatives exposure), real estate (26%) and private credit (11%) grow, and hedge fund allocations (23%). The hedge fund allocations are smaller than the 33% of the alts portfolio they accounted for in 2019 and 40% in 2018. Meanwhile investments in private equity and venture capital remained stable, and investments in private credit increased from 5% to 11% as many market participants anticipate COVID-19 initiating a credit cycle that will create opportunities for these managers, according to the service provider. But it isn’t that hedge fund assets are simply shrinking, managers have actually been tapping into new markets, such as private asset classes via a variety of unique structures. More than 40% of hedge fund managers, for instance, are now offering co-investment vehicles or best-idea portfolios and additionally almost 20% of managers are creating side pockets, which allow investors to participate in illiquid investments within a broader portfolio. Hedge fund managers told Ernst & Young that they expect that COVID-19 market volatility will drive a significant interest in active management, with over half of hedge fund managers (52%) surveyed believe that the impact of COVID-19, and the related market volatility, will increase investor interest in active management. To note, 30% of investors responded that the COVID-19-related market volatility has, in fact, increased their interest in actively managed alternative investments. The alternative funds industry has gained the trust of investors generally. Investors generally felt that their alternative fund managers either met or exceeded their performance return expectations, with 58% of hedge fund investors and the majority (81%) of private equity investors noting that their managers met or exceeded performance expectations during the market volatility that occurred as a result of the pandemic. Besides COVID, SPACs have been the other acronym du jour in 2020. Ernst & Young also tracked nearly a threefold increase in the amount raised in SPACs compared to 2019. This is due to the attractiveness as a way to raise capital as a number of managers are sponsoring these deals and traditional activist managers have been embracing in these types of transactions.

EY Survey: Hedge funds now a smaller slice of the private markets pie

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