Life has been difficult over the past 12 months for hedge funds, as managers have brought in far less new money than they expected.
According to Ernst & Young’s “2018 Global Alternative Fund Survey,” to be released Monday, only 7 percent of investors plan to increase their allocations to hedge funds in the next three years, compared to 18 percent in 2016. Twenty-one percent say they will dial back their hedge fund exposure. High fees are part of the reason hedge funds are having a tough go of it, but they’re also a victim of their own success. According to EÆY, hedge funds represent 40 percent of investors’ allocations to alternatives.
“The hedge fund industry’s continued lackluster performance relative to perceived high costs, combined with hedge funds comprising such a large percentage of investors’ existing portfolios, is top of mind for many,” for many investors, wrote the authors of the report.
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Private equity, however, is not showing any slowdown in fundraising. Thirty-four percent of surveyed investors plan to add to private equity, with only 9 percent saying they will reduce the asset class. Managers appear eager to take investors’ money. Sixty-five percent say the funds they planned to raise next year will be larger than their last one, according to the survey, which included the responses of 200 managers and 60 investors.
Investors are also continuing to form what they call partnerships with their alternatives managers. E&Y found that over the next two years 38 percent of respondents wanted to increase their ‘active limited partnerships,’ meaning they’ll participate in investment and operational decisions with their managers. Another 32 percent want to increase the number of direct investments they make.
The use of artificial intelligence is exploding in alternatives, particularly among hedge funds. Hedge funds’ use of AI grew 200 percent to compared to last year, according to EY, while the portion expecting to do so in the near future doubled.
Close to a third of hedge funds currently apply AI in their processes, whereas only 5 percent of private equity managers do so now, and the most have no plans to change. “Most private equity managers have not yet identified business cases to justify investing in AI,” the EY authors wrote.
Given their attitudes toward AI, it’s not surprising that private equity managers are also laggards on big data.
“Private equity managers are further behind in their use of next-gen data, as the use cases for private equity may be more limited,” according to the report. “Currently, nearly half of private equity managers do not use, and do not expect to use, next-gen data in the future.”
Hedge funds are on the other end of the spectrum. The majority — 70 percent — expect to use alternative data as part of their investment processes.
“The explosion in the volume of data that is available and the number of market participants utilizing it have begun to change how many hedge funds think of this information,” EY’s report said. “For many firms in the industry, what next-gen data was a few years ago is now just data.”