Alternative Investment Professionals See Inflation as Their Biggest Business Challenge in the Next 12 Months

• Health care/life sciences poised as best sector for Q4 investments as tech outlook falters
• Three-quarters of investors feel very or somewhat prepared to comply with forthcoming SEC reporting and compliance requirements

Inflation and recession woes are here to stay for the alternative investment industry, according to a new survey from advisory and accounting firm EisnerAmper. The annual survey, which was conducted during EisnerAmper’s 7th Annual Alternative Investment Summit, revealed that nearly three-quarters (74%) of alternative investment professionals believe the United States is already in a recession or will enter one by the end of the year. Along with inflation, geopolitical concerns and escalating regulatory scrutiny/compliance obligations were named as top business challenges alternative investors will face over the next year.

Despite a tepid macroeconomic outlook, survey respondents still see opportunity in the fourth quarter. When asked to name the top two industries that present the best investment potential for the remainder of the year, 41% of respondents selected health care/life sciences. Optimism for tech investments still exists but has cooled rapidly since last year; the sector was named as a top-two investment opportunity by 32% of respondents, down from 50% who said so last year. This marks the first time in four years of EisnerAmper’s survey that tech did not capture the top spot. Infrastructure (20%), environment/sustainability (15%), and crypto/digital assets (11%) also garnered votes.

“2021 has been a rollercoaster for alternative investment managers,” said Peter Cogan, Managing Partner of EisnerAmper’s Financial Services Group. “The ongoing war in Ukraine, coupled with global records of inflation and poor public market performance, have forced investors to be nimble in their investment philosophies. The Federal Reserve has made it clear that they’re steadfast in their mission to lower inflation and the survey shows that alternative investors expect this to be a long-term challenge to navigate.”

The survey also pointed to the opportunities and challenges that alternatives professionals continue to navigate with ESG. For the second year in a row, lack of standardized reporting and data sets was chosen as the biggest barrier to implementing ESG, with 45% of respondents saying so.

Despite recessionary fears, projected hiring in private equity and venture capital is up

A gloomy economic forecast is not stopping PE and VC firms from bolstering their teams. Fifty-four percent of firms expect to hire for their investment teams, followed by 51% for their operations teams, 21% for their investor relations teams and 11% for their marketing and communications teams. Only 26% of firms are not looking to hire in any of these areas in the next 12 months, down sharply from 41% who said so last year.

Cogan added, “A firm’s people strategy is equally as important as their investment strategy. Professional services firms and financial services firms have undoubtedly faced the pressures of the Great Resignation over the last two and a half years. It is reassuring to see that PE and VC firms are putting an emphasis on attaining strong talent and planning for succession, which has a strong correlation to capital creation.”

With volatility peaking across the globe, investors find the most investment solace in the United States. Seventy-two percent of respondents picked the country as the market with one of the top-two biggest investment opportunities in the next three years, followed by emerging Asia (28%) and developed Europe (23%). When asked where they expect LPs to increase investment allocation over the next year, sector-specific and growth equity ranked as the top two strategies. Notably, 33% of respondents named sector-specific as a top-two strategy, up from only 18% who said so last year.

Nearly three-quarters (74%) of PE and VC investors said that they have fundraised or launched a fund in the past six months. Of these investors, 30% said that they had to delay these efforts. When asked the same question, less than half (44%) of hedge fund executives said they have fundraised or launched a fund and 11% experienced delays.

Hedge funds bullish on long/short and global strategies and slow to adopt technology

Forty-two percent of hedge fund managers expect LPs to increase investment allocation to long/short and global in the next 12 months. This is a decrease from 2021’s survey where the strategy received 67% of the vote. Other strategies primed for LP investment this year, include event-driven (33%), credit (29%) and quant (19%).

While technology continues to develop and advance across the financial services industry, EisnerAmper’s survey has consistently shown that hedge funds are slower to adopt artificial intelligence (AI) and machine learning (ML) to make investments or trades. Only 12% of hedge fund investors surveyed say they are utilizing these tools in their investment process. While that number is still considerably low, this figure doubled from last year’s survey where only 5% of investors said they were utilizing AI or ML.

Featuring a fireside chat with acclaimed Broadway producer and booking executive Kevin McCollum, as well as speakers from The Future Hunters, CAIA Association, TIFF Investment Management, Star Mountain Capital, Morgan Stanley Wealth Management, Norgay Partners and other leading alternatives firms, EisnerAmper’s 7th Annual Alternative Investment Summit took place over two days of programming on September 21-22, 2022. EisnerAmper’s survey incorporated feedback from 244 event attendees, which consisted of CFOs, COOs, CIOs, CAOs, controllers, portfolio managers and operations specialists from across the alternatives industry.