Competition between alternative asset classes is getting tougher, reports EY

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Private equity, real estate and private credit are gaining allocations from investors, while hedge funds are losing. That, in a nutshell, is one of the main findings of EY’s annual Global Hedge Funds Survey, released this week.

Related: Why it’s time to rethink the 60/40 mix

Total allocations to alternative investments remained relatively unchanged year-over-year, but competition between asset classes continued to intensify. Following a multi-year trend, hedge fund allocations shrunk to just 23% in 2020, from 33% in 2019 and 40% in 2018.

Meanwhile, investments in private equity and venture capital have held steady at 26%, while investments in private credit have fallen from 5% in 2019 to 11%, as many market participants expect that the coronavirus pandemic will initiate a credit cycle, creating opportunities for these managers.

Real estate allocations increased to 26% from 23% last year.

For this year’s survey, Greenwich Associates conducted interviews from July through September with 110 hedge funds representing over $1.8 trillion in assets under management, 127 interviews with private equity firms representing nearly 2 $700 billion in assets and 73 interviews with institutional investors representing over $1.4 trillion in assets under management. assets under management.

The EY survey also found that hedge funds expanded their offerings or tapped into new markets, such as private asset classes in particular, through a variety of unique structures.

Two in five hedge fund managers currently offer co-investment vehicles or portfolios of best ideas, and one in five creates side pockets that allow investors to choose to participate in illiquid investments within a larger portfolio. .

Special purpose acquisition companies took off last year, EY reported, with a nearly three-fold increase in the amount raised in SPACs compared to 2019.

He noted that managers have found these types of permanent capital structures an attractive way to raise capital, acquire companies and accelerate them to the public markets.

Pandemic fallout

The survey found that the hedge fund industry met investor expectations and management performance during the market volatility resulting from the coronavirus crisis, with 58% of hedge fund investors and 81% of capital allocators -investment that have approved.

Additionally, nine out of 10 investors said their managers met or exceeded expectations for customer service in risk management, business updates and investor reporting.

Eighty percent of dispatchers said the remote environment caused little to no disruption in engagement and relationship due diligence with existing and potential managers.

For their part, alts managers said they expect 32% of their back-office and middle-office professionals to continue working remotely after conditions normalize, along with 28% of front office.

The coronavirus has accelerated many of the digital trends of recent years that have become critically important to alternative managers, EY reported.

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