Institutions steady on alternatives but cutting back on hedge funds

This post was originally published and is credit to this site


Institutional investors raised allocations to alternative investment strategies to an average of 25% in 2019 vs. 24% the previous year, results from Ernst & Young‘s 2019 Global Alternative Fund Survey, released Wednesday.

However, results from EY’s 13th annual survey of asset owners and alternative investment managers found that asset owners increasingly are redeploying assets from hedge funds to private equity, real estate and other non-traditional strategies.

“Hedge funds continue to make up the largest percentage of investors’ allocation to alternatives, but they are quickly giving up market share,” said researchers in a report, which is based on the results of the survey conducted by Greenwich Associates from July through September.

The average allocation to hedge funds by asset allocators (excluding funds of funds) surveyed was 33%, compared with 40% the previous year.

In contrast, the average allocation to private equity rose to 25% in 2019 from 18%, while the allocation to real estate strategies rose to 23% from 20%. The average allocation to other alternative funds, including private credit and infrastructure funds, decreased to 19% from 22%.

EY researchers said private equity and managers are expanding the range of their strategies beyond their core flagship approaches in response to investor demand.

Of the 96 private equity managers participating in the survey, 41% said they do or plan to offer illiquid credit funds; 23% said they do/will offer real assets or infrastructure strategies; 23% do/will offer venture capital; and 22% do/will offer real estate approaches.

Among the 113 hedge fund managers surveyed, 58% said they offer or plan to offer co-investment funds or best-idea portfolios, while 37% said they do/will offer illiquid credit funds; 29% do/will offer UCITS; 17% will/do offer real assets or infrastructure strategies; and 16% do/will offer real estate funds.

EY researchers noted in the report that asset owner demand for hedge funds investments through separately managed accounts and funds of one is “a trend that started this decade which shows no signs of slowing into the future.”

Survey results showed that more than 60% of all hedge fund managers, including more than 75% of those with assets greater than $10 billion, offer separately managed accounts.

Over the next two years, 39% of hedge fund managers surveyed said they expect the use of separately managed accounts by investors will increase, and 37% said they believe more investors will use funds of one and single-investor funds.

“We continue to see the industry recognize the importance of reacting to investor demand for personalization of offerings. SMAs/funds of one allow for customization of transparency, fee structures, investment mandates and other considerations that is important and unique to each investor,” according to the EY report.