As investors reallocate within alternatives, private equity is dominating hedge funds. According to the just-released EY 2019 Global Alternative Fund Survey, “When focusing on the future, where do you look?”, Private Equity is the winner, growing to 25 percent of institutional investors’ alternatives allocation in 2019, up from 18 percent last year. Over the same time period, Hedge Funds made up 33 percent of institutional investors’ allocations to alternatives, down from 40 percent in 2018. The aforementioned is with the overall backdrop that Alternatives as a whole made 25 percent of investors’ portfolios, up slightly from 2018.
Ten years ago, Hedge Funds and Private Equity operated in two distinct realms. But no more. Hedge fund managers are increasingly offering vehicles outside their core funds with co-investment and longer duration private equity opportunities. And private equity managers continue to converge with credit and real estate opportunities as well as launching large vintage funds. Indeed, according to the EY report, more than 25 percent of hedge funds have either a private equity or venture capital fund, while many private equity managers also offer liquid hedge fund strategies.
Alternative asset managers are embracing the importance of knowing their clients and customizing investment solutions to meet the needs of overall investment portfolios for these clients. We are going to see even more large bespoke structures to meet a specific investor’s risk, liquidity and capacity assess needs, as again demonstrated a few weeks ago when Britt Harris recommended $1 Billion allocations to both BlackRock and JP Morgan for UTIMCO’s first strategic partnerships.
In the rush for private equity, investors mention ho-hum hedge fund returns the last several years. And importantly, as investment know-how has sophisticated, some investors find within their reach the possible replication of selected hedge fund risk exposures on their own for their overall investment portfolios, whereas they simply cannot replicate the infrastructure needed to go direct for their classic private equity investments.