About 70% of investors expect a global recession over the next 12 months, but that has yet to hamper demand to either hold alternative allocations steady at their current level or grow them further in the years to come, according to the 2022 EY Global Alternative Fund Survey.
In the next three years, but of those expecting to increase their alternative asset exposure roughly 51% said they plan on adding on to private credit. According to EY this illustrates that many investors believe that this period of rising interest rates and deteriorating economic conditions will create a credit cycle that allows for interesting and lucrative investment opportunities in the space. Real estate (29%) and private equity (28%) were runners-up as only 9% of investors planned to increase their allocations to hedge funds.
The survey, published annually, fielded responses from a global cohort of 226 managers and 61 investors from May to August 2022 and was built in collaboration with Coalition Greenwich.
Managers expect to increase investor mandates by expanding into new asset classes, participating in opportunistic and special situation transactions and launching new fund structures to capture retail inflows, according to EY. Crossover funds continued to be a major area of focus, as 32% of hedge fund managers increased their exposure to private market investing and more than half (53%) of investors are not limiting their hedge fund managers’ exposure to PE and venture-capital style investments.
“The asset management industry is facing a multitude of headwinds and managers are finding themselves shifting and modernizing, both in terms of internal processes and front-office decision-making,” said Natalie Deak Jaros, EY global hedge fund co-leader and EY Americas Wealth & Asset Management co-leader, in a statement. “Our annual Global Alternative Fund Survey provides the industry with a better understanding of the trends that drive their business.”
Another area worth watching, according to the survey’s findings, is ESG investing as one-quarter of investors were found to have not invested with a manager in 2022 because of inadequate ESG policies.
Many of the largest alternative investors are public pensions, endowments and foundations that have their own environmental and socially responsible commitments and requirements to meet. With 14% of investors required to invest in these products and 29% anticipating being required to invest in these products in the next two to three years, this relatively new trend is expected to continue to grow, with governance and climate risk being top areas of interest, followed by human rights and DEI.
Managers are responding by developing corporate ESG policies (57%) and are implementing governance structures and embedding ESG into their investment decisions (53%).
The majority of alternative asset managers believe that there ESG reporting and compliance infrastructure is sound, as 56% of private equity managers provide reporting on these initiatives and 19% of hedge fund managers do as well.
As the SEC begins to push for greater ESG disclosure, the alternative asset management industry is concerned over the costs of regulatory proposals facing the private fund industry, according to the 2022 EY Survey findings. A total of 44% of surveyed managers believe the regulatory proposals facing the private fund industry have costs that outweigh the benefits.
For instance, 40% of surveyed hedge fund managers reported that they expect their budget for compliance and/or regulatory processes to increase 5% to 10%, and an additional 18% of managers expect their budgets to increase more than 10%.
“While the financial industry has come a long way since 2008, the findings from this year’s Global Alternative Fund Survey suggest that there’s still much to be done if many of these boutique managers are going to be competitive in an industry undergoing increased consolidation,” added Jun Li, EY Americas Wealth & Asset Management co-leader in a statement. “This initiative provides the industry with a fantastic framework to start from and I’m excited to work with our clients on leading practices and transformation efforts going forward.”