Market conditions and changing investor preferences are creating new challenges for hedge fund managers’ capital raising ambitions, allowing alternatives funds to gain favour with investors, according to EY’s annual alternative funds survey, ‘Global Alternative Fund Survey – At the Tipping Point: Disruption’.
The 12th annual survey (formerly the EY Global Hedge Fund Survey) found that 20 per cent of investors globally plan to decrease allocations to hedge funds in 2018, which continues a multi-year trend of slowing allocation appetite for hedge fund products.
Antoinette Elias, EY Oceania’s wealth and asset management leader, said following the survey: “Alternative asset managers are grappling with a whirlwind of changes, and they can either act now to address industry disruptions – ranging from technological innovation to products and competition from new players – or admit defeat and lose competitive market share.
“In order for alternatives to stay ahead, they need to meet investor demand for customization, implement technology that augments investment decisions, and hire the proper talent to both manage technology and bring outside thinking to the traditional financial services mindset.”
As investors demand more customised products and outcome-oriented solutions, hedge fund managers find themselves in increased competition as each is trying to tap into investor desires for non-traditional offerings such as private credit, real estate and real assets.
In Asia Pacific, just 18 per cent of hedge fund managers reported having a private credit offering, and 14 per cent having a private equity offering. The diversification of product offerings is directly resulting in convergence as managers across all strategies develop expertise and are branching out to a variety of alternative offerings.
But hedge fund managers are embracing artificial intelligence (AI) at a rapid pace in the front office. Quantitative managers have been on the forefront of this technology for years, but managers of all strategies are now building capabilities and taking advantage of next-generation trading systems and tools.
In Asia-Pacific, 16 per cent of hedge fund managers are already using AI, while a further 32 per cent are exploring AI with plans to implement the technology. The story is the same for next-generation data, as 58 per cent of hedge fund managers in the region are using, or expect to use alternative data within their investment process. The use of non-traditional data and/or AI is viewed by managers as an opportunity to enhance their investment process and differentiate themselves in a crowded, competitive landscape.
Rohit Khanna, EY Oceania’s hedge fund leader, said: “Not only do managers clearly see the benefit of AI and alternative data in helping them gain a competitive edge, but investors are actively seeking out managers that are exploring new innovations to deliver alpha.
“Not long ago we were only talking about quantitative managers utilizing these techniques; however, we continue to see increased adoption and use cases across all strategies.”
For alternative asset managers, talent management emerged as a key concern. More than 40 per cent of Asia Pacific hedge fund managers cited talent attrition as one of the industry’s top three risks.
In both the front and back office, nearly half of managers have changed the type of talent they’re looking for compared to five to 10 years ago. The prioritisation on talent does not necessarily translate to institutionalisation of this function. More than 80 per cent of hedge fund firms in Asia-Pacific say they do not have a formal talent management program in place. This is at odds with investor preferences, who overwhelmingly responded that a formal talent program is an important influence on their investment decision.
Elias said: “The ability to navigate the talent landscape has never been more critical for asset managers. Firms need to integrate technology skill sets with traditional finance professionals, which can be a challenging balance to achieve. Further, there is strong competition for data scientists, programmers and other in-demand skill sets among alternative asset management firms.”