The global alternative funds industry has managed to navigate pandemic-related disruption and uncertainties, with firms now considering ways to pivot towards proactive transformation and address emerging trends shaping the future of the sector, according to a recent survey.
The survey by EY, which is based on conversations with 210 managers and 54 investors globally, including many in Greater China, Singapore and Australia, offers key insights into the perspectives of alternative fund managers and the institutional investors who allocate to these asset classes.
Funds have been transforming their strategies and products to fit the changing profile and needs of investors, the report finds. 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 shows.
Strategies evolve with digital asset growth
“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,” says Christine Lin, EY’s wealth and asset management leader for Greater China. “Digital assets, for example, have become a mainstream trend, with their rise in popularity attracting the attention of both alternative fund managers and investors.”
While only one in ten 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 continue to grow as more traditional liquid hedge fund managers look to participate in the attractive private market opportunities.
Focused ESG critical to longevity
Alternative fund investors are increasing their incorporation of environmental, social and governance (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 notes.
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 say the same in Europe and 59% in North America.
“The alternatives funds landscape is in a time of significant transformation,” states Elliott Shadforth, EY’s wealth and asset management leader for Asia-Pacific. “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 to drive the continued sustainability and growth of the sector.”