The 12th annual survey (formerly the
New products result in blurred lines as firms address investor demand for customization and nontraditional portfolio exposures
As investors demand more customized products and outcome-oriented solutions, hedge fund and private equity managers find themselves in increased competition as each is increasingly tapping into investor desire for nontraditional offerings such as private credit, real estate and real assets. A majority of investors responded that they are increasingly allocating to a variety of offerings, including private credit, real estate and real assets. Thirty-five percent of hedge fund managers and 46% of private equity managers reported having a private credit offering. According to the survey, just under 30% of hedge fund managers reported having a private equity offering, and 20% of private equity managers reported having hedge products. The diversification of product offerings is directly resulting in convergence as managers across all strategies develop expertise and are branching out to a variety of alternative offerings.
Alternative asset managers are grappling with increased investor demand for more involvement in their investments as well. Allocators increasingly want to be more active partners with their managers and have a voice on investment decisions and operational matters. More than one-third of investors plan to increase this behavior as “active LPs,” and 32% say they will increasingly build out investment capabilities to replicate the strategy internally without the assistance of a third-party external manager.
Associated with the trend of investors becoming more active partners with their managers is a demand that product offerings be tailored to investors’ needs. Hedge funds are responding to increasing investor demand for customization by increasing or planning to increase 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.
Artificial intelligence (AI) and alternative data shake up the front office for hedge funds, but private equity firms trail in their adoption rate
Hedge fund managers are embracing AI at a rapid pace in the front office. Quantitative managers have been on the forefront of this technology for years, but managers of all strategies are now building capabilities and 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, as 70% of hedge fund managers are using, or expect to use alternative data within their investment process. The use of nontraditional data and/or AI is viewed by managers as an opportunity 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. While the business case for these technologies might not be apparent yet in private equity, once adoption increases, it could spread rapidly as it has with hedge funds. Larger private equity managers offer a possible glimpse into the near future: many of them are investing in big data to help identify investment opportunities while providing analysis into pricing trends that guide buyout negotiations.
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. However, the sophistication of the technology investments is more pronounced with hedge fund managers who are ahead in using AI and robotics to automate a variety of processes. Thirty-four percent of hedge fund managers indicated they have made back-office investments in robotics, which are resulting in more timely and accurate reporting. This compares to only 1% of private equity managers who reported using this technology.
Managing the evolving talent pool emerges as a key priority
For alternative asset managers, talent management emerged as a key concern. 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 of managers have changed the type of talent they’re looking for compared to 5 to 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. This reflects private equity’s place as a “people-driven” business, especially compared to other alternative asset managers.
The prioritization on talent does not necessarily translate to institutionalization of this very important function. 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.
The complete survey is available at www.ey.com/AltsSurvey.
Notes to Editors
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This news release has been issued by
The purpose of this study is to record the views and opinions of Alternative fund managers and institutional investors globally. Managers and investors were asked to comment on how disruption and innovation are reshaping the alternatives industry. Specific topics included strategic priorities; fundraising, new product development; convergence; the impact of advanced technology and alternative data on the front, middle and back office; the changing talent management landscape; cost management; and future views on the industry. From July to
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