EY survey finds Alternative fund managers expect to raise exposure to crypto, increasingly factor ESG in investment decisions

Alternative fund investors are increasingly factoring environmental, social and governance (ESG) considerations into investment decisions, with 75% saying their scrutiny of managers’ ESG policies has increased in the past two to three years.

The global alternative funds industry has managed to navigate pandemic-related disruption and uncertainties, with firms now considering ways to pivot toward proactive transformation and address emerging trends shaping the future of the sector, according to the 2021 EY Global Alternative Fund Survey.

Based on conversations with 210 managers and 54 investors globally, including in Greater China, Singapore and Australia in Asia-Pacific, the 15th annual survey offers key insights into the perspectives of alternative fund managers and the institutional investors who allocate to these asset classes. The report sheds light on the key topics that will be transforming the industry for years to come, including investors’ improved perception of alternative funds, the growing importance of ESG and diversity, equity and inclusion (DEI) considerations, and the industry’s view on product and strategy expansion into areas such as digital assets and an increased desire for exposure to private markets.

Elliott Shadforth, EY Asia-Pacific Wealth & Asset Management Leader said: “This year’s research really highlights the resilience of the alternative funds industry and the key transformations that managers and investors are working together to affect. Both globally and regionally, alternative fund returns were relatively strong throughout 2021, even as fund managers and investors addressed ongoing challenges posed by the COVID-19 pandemic.”

Funds have been transforming their strategies and products to fit the changing profile and needs of investors and, as a result, investors’ perceptions of value for alternative investments have risen, with more than half (51%) of those surveyed saying the value provided by alternative fund managers has improved relative to a few years ago. This positive shift in perception has been built on strong performance by alternative funds in the face of market and geopolitical uncertainties, as well as on managers being nimble and willing to customize product and strategy offerings, with 46% of managers saying that one of their top strategic priorities is to expand products and strategies.

Along with this strong performance, 42% of alternative fund managers globally are seeking growth by turning to retail channels, which is changing the investor profile for the industry, the survey showed.

Investment strategies evolving as digital asset interest grows

“2021 was a year where the industry really embraced new and evolving investment opportunities and themes, leading to increased investment in the alternative fund space. Digital assets, for example, have become a mainstream trend, with their rise in popularity attracting the attention of both alternative fund managers and investors,” said EY Greater China Wealth & Asset Management Leader Christine Lin.

While only 1 in 10 managers globally reported having current exposure to cryptocurrencies, one in four hedge funds expect to increase their exposure in the coming year. The special purpose acquisition company (SPAC) market was another growing area of interest during the year, garnering the attention of retail and institutional investors alike. Alternative fund managers have responded to the increasing investor interest in this space, with 37% of hedge fund managers and 28% of private equity managers indicating they participate or are considering participating in SPACs in some capacity.

Public-private crossover funds also continued to grow, as more traditional liquid hedge fund managers looked to participate in the attractive private market opportunities.

A focused ESG strategy is critical to longevity

Alternative fund investors are increasing their incorporation of ESG factors into investment decisions, with 75% globally saying their scrutiny of managers’ ESG policies has increased in the past two to three years. That focus on ESG has also caused some lost business to some industry players, with 39% of investors reporting that they have either passed on investing in a manager due to insufficient ESG adoption or required the manager to make meaningful improvements to their ESG policies.

Four in five investors say climate risk is a top ESG factor in their investment decision-making, with a majority indicating that it is one of the areas of increased focus this year.

“The increased attention in this space is likely to be to the benefit of managers that prioritize ESG and to the detriment of those that do not,” Lin said.

On that front, alternative fund managers in Asia have more work to do than their counterparts in the rest of the world, with 50% saying they have implemented ESG capabilities, compared with 78% who said the same in Europe and 59% in North America.

The “war on talent” hits the alternative fund space

This year’s survey found that nearly two-thirds of managers have experienced increased scrutiny on their DEI initiatives. Globally, fund managers reported meaningful diversity in their back offices, but continue to be challenged in the front office, with less than 1 in 10 hedge funds and only 2 in 10 private equity managers reporting having a front office that was comprised of 30% or more females, and significantly less composition from under-represented minority group.

“Discussions around how to recruit and retain top talent are occurring across most industries at the moment, both locally and regionally, and the alternative fund sector is no exception. Fund managers recognise that diversity yields better investment outcomes and that they need to create a flexible, inclusive and diverse working environment, not only to attract quality talent, but to address investors’ priorities. In fact, talent management was the number one overall business priority for the upcoming year, with two in three managers identifying it as a critical area of focus,” Shadforth said.

Looking to the future

“The wealth of topics covered in this year’s Global Alternative Fund Survey report – from the way 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 – clearly shows that the alternatives funds landscape is in a time of significant transformation,” Shadforth said.

“Many of these themes are likely to dominate industry conversations for years to come, and fund managers will need to continue to adapt and evolve in order to drive the continued sustainability and growth of the sector.”

The complete survey is available at ey.com/altssurvey.