The Challenges of Inflation for Alternative Investment Professionals

  • Health care and life sciences on track to be best sector for Q4 investment as tech outlook weakens
  • Three-quarters of investors feel very or somewhat prepared to meet upcoming SEC reporting and compliance requirements

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

Despite a lukewarm macro outlook, respondents still see opportunities in the fourth quarter. When asked to name the top two industries with the best investment potential for the rest of the year, 41% of respondents chose healthcare/life sciences. Optimism for technology investments still exists but has cooled rapidly since last year; the sector was named as one of the top two investment opportunities by 32% of respondents, up from 50% who said so last year. It’s the first time in EisnerAmper’s four-year survey that technology hasn’t taken the top spot. Infrastructure (20%), environment/sustainability (15%) and crypto/digital assets (11%) also garnered votes.

“2021 has been a roller coaster for alternative investment managers,” said Peter Cogan, managing partner of EisnerAmper’s financial services group. “The ongoing war in Ukraine, coupled with world record inflation and poor public market performance, has forced investors to be nimble in their investment philosophies. The Federal Reserve has made it clear that it is unwavering in its mission to reduce inflation and the survey shows that alternative investors expect this to be a long-term challenge.

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

Despite recession fears, planned hiring in private equity and venture capital is on the rise

The bleak economic outlook isn’t stopping private equity and venture capital firms from beefing up their teams. Fifty-four percent of companies plan 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 . Just 26% of companies are not looking to hire in any of these areas over the next 12 months, down sharply from the 41% who said so last year.

Cogan added, “A company’s people strategy is just as important as its investment strategy. Professional services firms and financial services firms have no doubt faced the pressures of the Great Resignation over the past two and a half years. It is reassuring to see that private equity and venture capital firms are emphasizing the search for strong talent and succession planning, which is strongly correlated with capital creation.

With volatility peaking across the world, investors are finding the greatest investment solace in the United States. Seventy-two percent of respondents chose the country as the market with one of the two biggest investment opportunities over 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 and growth stocks ranked among the top two strategies. Notably, 33% of respondents named the specific industry as one of the top two strategies, up from just 18% who said so last year.

Almost three-quarters (74%) of private equity and venture capital investors said they had raised money or started a fund in the past six months. Of those investors, 30% said they had to delay those efforts. When asked the same question, less than half (44%) of hedge fund managers said they had raised funds or launched a fund and 11% had experienced delays.

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

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

As technology continues to develop and advance in 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 transactions. Only 12% of hedge fund investors surveyed say they use these tools in their investment process. While this number is still considerably low, this figure has doubled from last year’s survey where only 5% of investors said they use AI or ML.

Featuring a fireside chat with acclaimed Broadway producer and booking director Kevin McCollum, plus speakers from The Future Hunters, CAIA Association, TIFF Investment Management, Star Mountain Capital, Morgan Stanley Wealth Management, Norgay Partners and other leading alternative companies, the 7th annual EisnerAmper 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 included CFOs, COOs, CIOs, CEOs, Controllers, Portfolio Managers and Operations Specialists from across the alternative industry. .