Disruption, innovation and the alternative asset management industry

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As market conditions and investment preferences shift, investors are looking to private equity and other asset classes, while hedge funds face headwinds raising capital, according to EY’s 2018 Global Alternative Fund Survey, At the Tipping Point: Disruption and the pace of change in the alternative asset management industry.

The survey results found that 20 per cent of investors plan to decrease allocations to hedge funds in 2018, while 34 per cent plan to increase allocations to private equity.

The survey also showed alternative asset managers are dealing with more investors who want increased say in investment decisions and who want product offerings to be tailored to their needs. Hedge funds are responding by increasing, or planning to increase, their number of Separately Managed Accounts and funds of one.

The survey also looked at the rate alternative managers are adopting artificial intelligence. It found that 29 per cent of hedge fund managers are using AI compared to 10 per cent last year. As well, 70 per cent of hedge fund managers are using, or expect to use, alternative data in their investment process.

“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,” said Dave Racich, EY global hedge fund services co-leader in a press release.

This move to AI was not as prevalent for private equity firms, with three-quarters of respondents indicating that they don’t use AI or have an intention to use it.

The survey found a common concern among alternative asset managers is talent management. More than forty per cent of hedge fund managers and 50 per cent of private equity managers said talent attrition was one of the industry’s top three risks.

“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 appease 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,” said Natalie Deak Jaros, EY global hedge fund services co-leader in a press release.

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