New EY research shows investors are turning away from hedge funds and looking to private equity assets to uphold their alternatives portfolio.
While hedge funds currently have the lion's share (40%) of institutional investors' alternatives portfolios, private equity managers are seeing heightened interest in their products.
About a third of the 60 institutional investors canvassed in EY's Global Hedge Fund Survey plan to increase allocations to private equity. Many are also confident investors will not decrease their exposure to private equity assets over the next three years.
One-in-five plan to decrease allocations to hedge funds in the short term.
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EY also surveyed 200 alternative asset managers and found they are grappling with a numerous changes disrupting the industry.
One challenge is investors increasingly demanding to be more involved and have an active partnership in their investments, particularly when it comes to investing decisions and operational matters, the report said.
More than one-third of investors plan to increase this activism. About 32% said they will increasingly build out investment capabilities to replicate the strategy internally without the assistance of a third-party external manager.
Another operational "headache" for alternative asset managers is investors demanding product offerings tailored to their needs.
Hedge fund managers are appeasing these needs by increasing or planning to increase the number of separately managed accounts (SMAs) and funds they offer.
On the artificial intelligence front, nearly three times as many hedge fund managers are using AI compared to last year (29% vs. 10%), the report noted.
Similarly, 31% of hedge managers are exploring AI and have plans to implement the technology, compared to just 17% last year.
EY global hedge fund services co-leader Natalie Deak Jaros said alternative asset managers can either act now to address industry disruptions ranging from technological innovation to products and competition.
"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," she said.