EY’s 12th annual Global Hedge Fund and Investor Survey has been renamed as the Global Alternative Fund Survey, which reflects how many key trends and themes seen in hedge funds are also relevant to private equity and real estate. Both hedge fund managers and private equity managers prioritise the same four objectives – asset growth, talent management, cost management and operational efficiency – in the same order, the report finds.
The most obvious reason for hedge fund managers moving into private equity is that the latter has lately had more success in asset raising and maintaining fee levels, while also seeing less margin erosion. The report views the rapidly growing area of private credit as being “an intersection between traditional hedge fund and private equity managers”, and has found that 50% of the managers of the largest hedge funds interviewed have a private credit offering.
Convergence can also be seen in hedge funds offering fund and fee structures similar to those seen in private equity, for longer duration strategies. New fee structures are also addressing investor concerns and, as USD interest rates rise, it is unsurprising that the vast majority of investors want to see a hurdle rate under performance fees.
Next generation data, robotics and artificial intelligence have become a key theme when we interview managers. Not least in our cover feature on BlueMountain Capital Management, originally a discretionary credit manager, that has developed systematic and quantitative expertise as part of its diversification into a broader array of strategies. This issue also interviews two service providers – Nasdaq and Crux Informatics – which are helping asset managers to use alternative, or non-traditional, data. It is used for both fundamental and quantitative approaches, and also for automated, algorithmic trade execution.
Data, automation and AI have seen the most spectacular growth in front office functions – 300% year on year for AI. But they are also germane to the back and middle office processes, such as confirmations, reconciliations and regulatory reporting, on which firms such as EY advise. Hedge funds have been faster adopters of AI and automation than private equity managers.
Human capital, gender and cultural diversity are also high priorities, as seen in EY’s sponsorship of The Hedge Fund Journal’s “50 Leading Women in Hedge Funds” survey.
Separately managed accounts, co-investments and customisation continue to be important drivers of fundraising for hedge fund managers, but may not be practical for every manager. SMAs do pose an increased operational burden for over half the hedge manager respondents.
Some 16% of hedge fund managers surveyed plan to offer a socially responsible fund, reflecting the rise and rise of ESG and impact investing – something we touch on in our review of the Legends 4 Legends event (see our next issue, Issue 137).
Interestingly, only 10% of alternative funds canvassed currently invest in cryptocurrency products, or contemplate doing so. This suggests that digital assets are still at a relatively early stage of development.