Alternative funds transform approach to ESG, talent and new products

Elliott Shadforth, the Asia-Pacific Wealth and Asset Management Leader, EY

The global alternative funds industry has navigated pandemic disruptions and uncertainty with firms considering ways to pivot proactive transformation and address emerging trends for the future of the sector, according to the 2021 EY Global Alternative Fund Survey.

Surveying 210 managers and 54 investors globally, including China, Singapore and Australia in Asia-Pacific, the survey offers key insights into the perspectives of alternative fund managers and the institutional investors who allocate to these asset classes.

The report highlights key topics that will transform the industry for years to come.

They include improved perception of alternative funds, the importance of ESG and diversity plus equity and inclusion (DEI), as well as the industry’s view on product and strategy expansion into digital assets and an increased desire for exposure to private markets.

Elliott Shadforth, the EY Asia-Pacific Wealth and Asset Management Leader is buoyant.

“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.”

“Alternative fund returns were relatively strong throughout 2021, even as fund managers and investors addressed ongoing challenges posed by the COVID-19 pandemic.”

Funds transformed strategies and products to fit the new profiles and needs of investors.

Investors’ perceptions of value for alternatives have risen, with 51% of participants saying that the value provided by alternative funds 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, and managers being nimble.

Managers are 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.

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

Strategies evolving as digital asset interest grows

EY’s Oceania Wealth and Asset Management Leader, Rita Da Silva offered insights.

“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.”

“For example, digital assets have become a mainstream trend with their rise in popularity thus attracting the attention of both alternative fund managers and investors.”

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

Investors are increasing their incorporation of ESG into investment decisions as 75% said that their scrutiny of managers’ ESG policies has increased in the past 2 to 3 years.

That focus on ESG has also caused some lost business to some industry players.

39% of investors reported either passing on investing in a fund due to insufficient ESG adoption or required the manager to make meaningful improvements to their ESG policies.

4 in 5 investors said that climate risk is a top ESG factor in their investment decision making and a majority indicated 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,” Da Silva 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

Nearly two-thirds of managers experienced increased scrutiny on their DEI initiatives.

Managers reported diversity in back offices, but continue to be challenged in the front office.

Less than 1 in 10 hedge funds and only 2 in 10 private equities have front offices with 30% or more females plus very low composition from the under-represented minority group.

“Discussions on how to recruit and retain top talent are occurring in most industries at the moment, both locally and regionally, and the alternative fund sector is no exception.”

“Diversity yields better outcomes and they need to create a flexible, inclusive and diverse working environment to attract quality talent and 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,” Da Silva said.

Looking to the future

“There is a 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.”

“They are likely to dominate industry talks for years and fund managers need to adapt and evolve in order to drive the continued sustainability and growth of the sector.”