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Managers, focused on their traditional strengths while being responsive to opportunities arising in the market, are increasing their product offerings in areas such as illiquid credit, real estate, private equity, venture capital, and opportunistic or special situations. In addition, managers are expanding distribution of their existing products to new customers, such as retail investors, and are incorporating differentiated investing criteria within an existing strategy, such as private market investing within a hedge fund. Exposure to digital assets remains small, as most managers indicated that digital assets comprise less than 2% of their overall portfolios. Plus, managers are offering — and investors are interested in — sustainable and impact investment products and environmental, social and governance (ESG), as many of the largest alternative investors are public pensions, endowments and foundations that have their own environmental and socially responsible commitments and requirements to fulfill.


It comes as no surprise that managers and investors alike identified their top business challenge as responding to the various market risks, with managers and investors viewing public market volatility, changing interest rates and talent management as leading concerns. In addition, both managers and investors expressed recessionary concerns in their 12-month economic outlook, with marginally heightened concerns noted for global economic indicators as compared with those specific to the US economy.


This ongoing marketplace instability has prompted alternative fund managers to think beyond immediate short-term navigation of the global economy and markets. In addition to delivering on their commitments, they are thoughtfully embracing a more long-term view of their overall business to position it for the future. Managers are becoming more active in succession planning and have engaged in or are considering engaging in strategic transactions designed to strengthen long-term business viability, with investors more actively engaged than ever in conversations with managers around their succession-planning strategies.


The ongoing demand on talent has elevated talent management as a major concern for managers and investors alike. To combat the problem, managers are applying a multipronged approach to improve talent retention by increasing compensation, prioritizing diversity and inclusiveness, and expanding flexibility, job roles and responsibilities. The majority of investors reported that scrutiny of their fund manager’s talent programs has increased, with an expanded focus on diversity, equity and inclusion (DEI). And in this post-COVID-19 environment, the industry’s workplace flexibility policies are changing from last year’s practices, with hybrid and remote work being replaced by more structured return-to-the-office work policies.


In addition to the rise of responsible and impact investing and the new market reality, managers need to prepare for the increased number of global regulatory changes and proposals that, if adopted, would require increased reporting responsibilities and the associated costs of compliance. Over half of alternative managers believe that their infrastructure is well prepared and that they are aware of the gaps that need to be addressed. Although larger firms have the resources to effectively meet these increased challenges, the cost of compliance may disproportionately impact smaller and midsized firms.


And while currently not directly impacting funds managed by alternative managers, the SEC’s increased climate disclosure proposal for public companies has contributed to an overall trend of increased investor scrutiny of managers’ corporate ESG policies and investment criteria. In response to this increased scrutiny, managers are developing ESG policies and implementing governance structures to set policy and embed ESG into their investment decision-making processes. Meeting investor ESG policy and reporting requirements is becoming increasingly important, as 26% of investors decided in 2022 not to invest with a manager because of inadequate ESG policies, a five-point gain from 2021. This increase should serve as a warning for managers to take investors’ demands for appropriate ESG policies and reporting seriously. Managers who neglect this trend may lose out on investor interest and capital allocations.

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