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Hedge fund sector embraces new investment opportunities

Despite the COVID pandemic continuing to affect operations last year, the hedge fund industry adapted and built on the momentum gained in 2020 with strong earnings and new investment strategies.


These results improved perception of the industry, according to the 2021 EY Global Alternative Fund Survey.


“Alternative fund managers have partnered with their investors to nimbly embrace opportunities during the market turbulence of the pandemic,” said Jeff Short, partner at EY Cayman Ltd. and regional wealth and asset management leader.


“The industry is undergoing proactive transformation on several fronts, enhancing its value proposition and boding well for the future of Cayman’s world-leading funds sector.”


The survey, based on conversations with 210 managers and 54 investors, found that the industry has embraced new investment opportunities.


Digital assets have become a mainstream trend. One in 10 managers reported having current exposure to cryptocurrencies, while one in four expect to increase their exposure this year.


The special-purpose acquisition company (SPAC) market also caught the attention of investors. Alternative fund managers responded, with 37% of hedge fund and 28% of private equity managers indicating they participate, or are considering participating in some capacity, in SPACs.


Approximately one-third of global SPACs are located in Cayman.


In addition, the crossover of public-private investments increased as 40% of hedge fund managers indicated they are participating in private market opportunities.


The survey showed that hedge funds are developing a sharper focus on factoring environmental, social and governance (ESG) criteria into their investment decisions. About three-quarters of investors said they have increased their scrutiny of managers’ ESG policies in the past two to three years. This creates an opportunity for managers who prioritise ESG.


Four in five investors said climate risk is a top ESG factor in their investment decision-making, while 39% report that they have either passed on investing with a manager due to insufficient ESG adoption or required meaningful improvements to their ESG policies.


Eleanor Fisher, ESG leader for the EY region of the Bahamas, Bermuda, British Virgin Islands and the Cayman Islands, said the research shows that ESG considerations are prominent for alternative fund managers and their investors for sound business reasons.


“Sustainability policies and incorporation of diversity principles into talent management are at the heart of the industry’s ongoing transformation,” she noted.


For this year, managers have identified talent management as the top priority. Two-thirds of managers said it is a critical area for their business.


But while fund managers reported meaningful diversity in their back offices, fewer than one in 10 hedge funds and only two in 10 private equity managers reported having a front office that was 30% or more female, with significantly lower representation of minorities.


The strong performance of hedge funds during market uncertainties has started to improve investor perceptions. More than half of investors (51%) said the value provided by alternative fund managers has risen.


Allocations to hedge funds have also rebounded and are now on par with private equity. Institutional investors reported allocating 28% of their assets under management to hedge funds and 27% to private equity and venture capital.


This is in stark contrast to 2018 when hedge fund allocations (40%) outpaced private equity (18%) by a two-to-one margin, and in 2020, when private equity fund allocations (26%) exceeded hedge funds (23%).


The complete survey is available at ey.com/altssurvey.


Source: CaymanCompass


IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.


Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.

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