Market conditions and changing investor preferences are creating new challenges for hedge fund managers’ capital raising ambitions writes EY’s Fergus McNally. He analyses the key findings from EY’s 2018 Global Alternative Fund Survey which shows these conditions are enabling private equity and other alternatives to gain favour with investors.
The survey found that 20% of investors plan to decrease allocations to hedge funds in 2018, continuing the trend of slowing allocation appetite for hedge fund products. Conversely, private equity managers are seeing heightened interest in their products. A third of investors (34%) plan increased allocations to private equity, while only 9% foresee decreases in allocations in the next three years.
We continue to witness the barbell effect right across asset management with passives on one side and alternatives on the other. A common thread pervades both sides and that is how technology is being applied and developed to gain an edge on efficiency and cost or through alternative data, robotics and AI to identify trends and opportunities faster than your competitors.
As demand for private equity products intensifies, it’s never been more important for us in Ireland to legislate for and position the ILP product which would no doubt attract more asset managers to establish products in Ireland.
As investors demand more customised products and outcome-oriented solutions, hedge fund and private equity managers find themselves in increased competition over non-traditional offerings including private credit, real estate and real assets. 35% of hedge fund managers and 46% of private equity managers reported having a private credit offering. 30% of hedge fund managers reported having a private equity offering, and 20% of private equity managers reported having hedge products. Managers across all strategies are branching out to a variety of alternative offerings.
There is also increasing demand for product offerings to be tailored to investors’ needs. Hedge funds are responding by increasing the number of separately managed accounts (SMAs) and funds of one they offer. Over a third of hedge funds offer, or plan to offer, funds or SMAs with tailored investment portfolios for specific investors. These products appease investor demands, but create operational headaches for alternative asset managers.
Hedge fund managers are embracing AI at a rapid pace in the front office, taking advantage of next-generation trading systems and tools. Nearly three times as many hedge fund managers are using AI compared to last year (29% vs 10%). Similarly, 31% of hedge managers are exploring AI and have plans to implement the technology, compared to just 17% last year.
The story is the same for next-generation data. 70% of hedge fund managers are using, or expect to use, alternative data to enhance their investment process and differentiate themselves in a crowded, competitive landscape. The AI adoption rate among private equity firms is much lower, with three quarters of respondents indicating they don’t use AI and have no intention to do so.
In the back and middle office, both hedge funds and private equity continue to invest in technology solutions. Both see value in leveraging technology for middle-office functions, including treasury as well as compliance and regulatory reporting, but hedge fund managers are ahead in using AI and robotics to automate a variety of processes. 34% of hedge fund managers have made back-office investments in robotics, resulting in more timely and accurate reporting, as compared to just 1% of private equity managers.
More than 40% of hedge fund managers and 50% of private equity managers cited talent attrition as one of the industry’s top three risks. In both the front and back office, nearly half are looking for a different type of talent than they were 5-10 years ago. While hedge funds look for talent with data and analytics experience, private equity funds are steering their people searches toward gender and cultural diversity – reflecting private equity’s place as a “people-driven” business.
However, more than 60% of hedge fund firms and more than half of private equity firms say they do not have a formal talent management program in place. This is at odds with investor preferences, as 68% responded that a formal talent program is an important influence on their investment decision.
From July to September 2018, 102 interviews were conducted with hedge funds representing over $1.1 trillion in assets under management (AUM), 103 interviews with private equity firms representing nearly $2.2 trillion AUM, and 65 interviews with institutional investors (funds of funds, pension funds, endowments and foundations) representing over $2.7 trillion AUM.
This article first appeared in the Investment Funds 2019 report by Finance Dublin.