The twelfth annual report of what used to be known as the EY Global Hedge Fund Survey has been re-christened the EY Global Alternative Fund Survey. As it has under the earlier name, EY again records the views of fund managers and investors around the globe on a wide range of issues affecting both groups.
This year, the report stresses what one may call “AI squared,”—the place of artificial intelligence as a disruptive technology within alternative investments. In the words of Natalie Deak Jaros, EY global hedge fund services co-leader, “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.”
This is the age of Big Data: 90% of the data in the world has been created within the past two years. EY tells us that the majority of hedge funds have either used or are evaluating the use of “next generation” data in their investing. What they might have considered futuristic two years ago is “just data” for many of them now.
Hedge funds are out ahead of private equity managers on this point. But the larger PE managers are making investments in this space, “utilizing big data to help identify investment opportunities and provide analysis into pricing trends that are ultimately guiding acquisition negotiations,” according to the report.
There has also been “significant growth in the proportion of hedge fund managers that leverage robotics to perform routine, repetitive tasks in the middle and back office.”
Investors, Fashion, and Beyond
Investors are increasingly coming to expect that their alternatives managers will make use of data and of the appropriate hardware and algorithms by which it is harnessed. Managers that don’t follow the trend “may need to justify the rationale,” according to the report. Less delicately put, they may need to be able to answer the question: why the heck not?
EY also suggests that there may be something of mere fashion at work here. Though investors expect their managers to make use of next gen data and artificial intelligence, only 11% of investors report that they have “evaluated the impact of these technologies on performance.”
In one corner of the tech space, the trade in cryptocurrencies, hedge fund managers are looking before they leap. Prices have risen and fallen dramatically in cryptos over the last two years, creating a great risk of getting caught on the wrong side of a quick swing. “Notwithstanding the fact that a number of smaller, new entrants to the [alternatives] market may have the sole strategy of trading cryptocurrencies,” EY writes, “most of the managers in our study expressed that they were treading cautiously. Only one in 10 indicated they were active or planned to become active in trading these products.”
Investors, likewise, are only slowly adopting cryptos. Only 12% of those questioned said that they have any exposure.
The report also delves into the evolving workforce for both hedge funds and private equity. Given the trends discussed above, hedge funds “are seeking out candidates with data analytics experience, as well as those with coding/programming skills.”
In the PE world, on the other hand, there is a greater focus right now on “gender and cultural diversity, particularly in the front office.” The idea is that a more diverse organization can better find, evaluate, and exploit valuable investment opportunities.
In both worlds, keeping talent (or, to put it negatively avoiding talent attrition) is as important as attracting it in the first place. Forty percent of the hedge fund managers surveyed and 50% of the PE managers said that talent attrition is one of their industry’s top three risks.
Investors also are focusing, sensibly enough, on the makeup of the workforce within the offices of their actual and potential alt investment managers. Nearly eight out of every 10 investors asked say that they study the manager’s talent management as part of their due diligence.
Talent management encompasses hiring, retention, and grooming the next generation of leadership from within the ranks. EY finds a widespread attitude among investors that “bench strength is critical to the decision to invest.” This is true in both front and back office, that is, for both the investment and the business professionals.