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Allocations shift from hedge funds to private markets

private equity, private debt, private marketsAllocations to private markets investments are growing and hedge fund exposures are reducing, research shows.

EY, the consultancy firm, said investors were allocating the same amount of their portfolios to alternatives year-over-year, but allocations continue to shift towards private equity, real estate and private debt, away from hedge funds.

EY said that despite extreme levels of market volatility, increased trading volumes and disruptions to society due to Covid-19, alternative fund managers had “persevered and even exceeded” performance expectations from investors.

Nonetheless, managers continue to face challenges in addressing important areas of focus, including environmental, social and governance products, and diversity and inclusion, according to the ‘2020 EY global alternative fund survey’.

Following a multi-year trend, allocations to hedge funds shrunk to just 23% in 2020 (from 33% last year) as competition between asset classes intensifies.

Investments in private equity and venture capital remained stable at 26%, while investments in private credit increased from 5% to 11% as many market participants anticipate Covid-19 will cause a credit cycle that will create opportunities for these managers, the report said.

Although hedge fund allocations were reducing, hedge funds have expanded into new markets, such as private asset classes.  

Ryan Munson, wealth and asset management partner at EY, the alternative investment funds industry had been able to “quickly pivot operations, minimise disruption to investor engagement and deliver performance during periods of extreme market volatility”. These actions highlighted the value of alternatives in preserving and growing investor capital in the most challenging of markets.

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