Three-quarters (75 per cent) of institutional investors say their alternative asset managers are either meeting or exceeding performance expectations in 2022 despite operating in a challenging and volatile market period, according to a survey by EY.

The survey, which polled 114 hedge fund managers, 112 private equity firms and 61 institutional investors, found 50 per cent of institutional investors with private equity assets cited outperformance of expectations, including in real estate (45 per cent) and real assets/infrastructure (38 per cent).

More than half (53 per cent) of investors noted they aren’t limiting their hedge fund managers’ exposure to private equity and venture capital-style investments. Indeed, a third (32 per cent) of hedge fund managers said they’ve increased their exposure to private market investing.

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While just 14 per cent of institutional investors said they’re required to make environmentally and socially responsible investments, nearly a third (29 per cent) anticipate they’ll be required to make these investments over the next two to three years. These investments include socially responsible funds or separately managed accounts (34 per cent); funds that have some portion of their assets dedicated specifically to investing to address environmental, social and governance issues (32 per cent); impact funds (30 per cent); carbon funds/investment in carbon credits (18 per cent); ESG share class for conforming investments within a fund, such as ESG exposure within a broader portfolio (16 per cent); and opt-out ability for non ESG-friendly investments, such as shorting and Bitcoin (seven per cent).

The survey also indicated more than half of asset managers are responding to increased investor pressure by developing corporate ESG policies and implementing governance structures (57 per cent), as well as embedding ESG into their investment decisions (53 per cent). Notably, 56 per cent of private equity managers said they provide reporting on ESG policies and procedures, as do 19 per cent of hedge fund managers.

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Slightly more than a quarter (26 per cent) of institutional investors said they decided not to invest with a manager because of inadequate ESG policies, a five-point increase from 2021. While nearly two-thirds (65 per cent) of asset managers said their compliance and reporting infrastructure is well prepared, fewer than a fifth said their ESG reporting and compliance infrastructure needs upgrading (19 per cent) or they haven’t yet performed a gap analysis (16 per cent).

Talent management also continued to play a much larger role in investors’ evaluations of their managers in 2022, with more than 55 per cent saying scrutiny of their asset managers’ talent programs and policies has increased over the last two to three years.

In terms of expectations for the next year, both asset managers and institutional investors said they anticipate a global recession (64 per cent and 70 per cent, respectively); a recession in the U.S. (44 per cent and 55 per cent); severe market impacts due to geopolitical shocks (39 per cent and 46 per cent), global hyperinflation (14 per cent and 13 per cent), markets returning to more normalized patterns (13 per cent each) and hyperinflation in the U.S. (four per cent and five per cent).

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