EY Global Alternative Fund Survey Highlights Managers' Resilience amid COVID-19

EY Luxembourg has announced the publication of the 2020 EY Global Alternative Fund Survey, according to which alternative fund managers have proven to be resilient amid the COVID-19 crisis.

The survey showed that alternative fund managers have persevered and sometimes even exceeded the expectations of investors in terms of performance, despite extreme levels of market volatility, increasing transaction volumes and upheavals within the company related to COVID-19. However, these managers still do not meet expectations, notably in the areas of providing products that meet environmental, social and governance (ESG) criteria and which are linked to diversity and inclusion.

The 14th edition of this study showed that the volume of assets dedicated to alternative investments has remained unchanged. Nevertheless, competition between asset classes continues to intensify. Based on a trend analysis spanning several years, the share allocated to hedge funds fell further, reaching 23% in 2020, compared to 33% in 2019 and 40% in 2018. Investments in private equity and venture capital remained stable at 26 %, while private credit investments increased from 5% to 11%, at a time when respondents anticipate the launch of a credit cycle triggered by COVID-19.

A change in alternative products was not the only upheaval this year. 30% of hedge fund managers expected increased interest in active management due to market volatility induced by COVID-19, with 52% of respondents believing that COVID-19 and market volatility would increase investors' interest in active management. Almost one-third (30%) of the investors surveyed confirmed that an increased interest on their part in actively managed alternative investments was none other than a consequence of post-COVID-19 market volatility. 

Alternative investment funds have demonstrated resilience in response to the pandemic, with the use of technology remaining a driving force behind this success.

In addition, the hedge fund industry has coped with the COVID-19 pandemic in terms of investor expectations and manager performance. The majority of alternative fund managers, 58% of hedge fund managers and 81% of private equity investors, confirmed that their managers met or even exceeded performance expectations during the period of market volatility resulting from the pandemic.

Operationally, the hedge fund industry expects operations to return to normal, with a successful transition to telecommuting. Despite these promising prospects, hedge fund managers expect a continuation of teleworking for one-third (32%) of back and middle office professionals, as well as 28% of front office professionals. This change highlights the efficiency and resilience that each group has shown, but is also a testament to the ever-changing attitude of employees towards greater flexibility in the workplace.

COVID-19 has accelerated many of the digitalisation trends seen in recent years, which are now of critical importance to alternative asset managers. Investors were quite happy with the efforts made by managers to manage technology and data. Hedge funds were viewed fairly well by half (53%) of the investors surveyed, who believed that the hedge fund industry was at the cutting edge of technology compared to other financial services. Based on an analysis of the credit and private equity sectors, only 30% and 28% of respondents respectively shared this opinion.

Despite this progress, the study showed that there is room for improvement in the outsourcing of certain functions, with no fund manager having reported fully automated reporting services. Like advanced technologies, hedge funds were more advanced in their automation processes, particularly in fund accounting, treasury and valuation.

“COVID-19 has served as a catalyst in the alternative industry, both in the way companies are using technology to facilitate telecommuting, but equally in terms of the use of technology, in particular to put in place modern systems that improve productivity", noted Michael Ferguson, Wealth & Asset Management Leader at EY Luxembourg. "Hedge funds are clearly in the vanguard, having opted for outsourcing first. They continue to rely on innovative tools such as machine learning, robotics and blockchain technology to stay in step with their complex and ever-changing businesses".

Investors have gradually focussed on ESG products and socially responsible investments, but also considered entering into partnerships with managers wishing to favour their own internal ESG policies. As the study highlighted, almost half (49%) of investors currently invest in ESG products, which is almost double the number of investors including ESG products in their portfolios in 2019 (26%). In addition, more than one-quarter of investors were required to invest in socially responsible products, almost double the previous year. This trend is largely explained by investors being located outside the United States, with the majority (84%) based in Europe and currently investing or planning to invest in ESG products within the next two years.

Regardless of the product, nearly three-quarters (70%) of investors said that the internal ESG policy of an alternative manager was of utmost importance in deciding to invest - a considerable increase from 2019 (27%). Private equity funds were more advanced than their hedge fund counterparts, with nearly 64% of private equity fund managers currently having an ESG policy, compared to only half of hedge fund managers.

Whilst both prioritised talent management, hedge funds and private equity firms took different approaches. Private equity firms prioritised increasing gender representation, with more than half (56%) saying it was one of their top three priorities and one-quarter (24%) placing it at the top of their priorities. In addition, more than half (52%) of managers said that increasing the representation of ethnic minorities was one of their top three priorities. Implementing strategies to increase gender and ethnic diversity was lower on the priority list of hedge fund managers, with 26% of managers considering increasing gender representation and 23% increasing representation of ethnic minorities as one of their top three priorities.

Investors, on the other hand, were keenly aware of the need for greater diversity. Almost all investors noted that a manager's diversity and inclusion policy played a role in their investment decision. While awareness is crucial to achieving greater diversity, there is significant room for growth, as the majority of alternative fund managers (68%) have informal diversity and inclusion policies, if any at all. 

Further information on the results of the survey is available (in English) at www.ey.com/en_lu/wealth-asset-management/does-accelerating-adaptation-present-obstacles-or-increase-opportunities.