with so much volatility in the markets investors have been left with virtually nowhere to hide but hedge funds have demonstrated how they can protect capital during periods of upheaval the eurekahedge hedge fund index is down 5 year to date through october compared to the sp 500s decline of 17 investors are clearly recognizing that alternative funds including hedge funds are protecting their assets based on ernst  young eys latest global alternative fund survey most investors plan to hold their alternative allocations steady in the near future but of those planning to make changes most expect to increase their allocations the current combination of macroeconomic geopolitical and regulatory headwinds facing the global financial markets may be unlike anything since the 20072008 great financial crisis periods of uncertainty could offer opportunities alongside the threats it brings in 2022 the alternative fund industry has faced persistent ramifications from the pandemic and central banks attempts to control inflation in the wake of the pandemicera support that boosted inflation to decadeshigh levels geopolitical instability has also helped roil the markets this year despite all this turmoil investors have seen and continue to see value in alternative funds and remain invested in them for diversification risk mitigation and maximization of returns meanwhile fund managers are focusing on their traditional strengths as they respond to opportunities appearing in the market while most investors expect to keep their alternative allocations steady this year most of those expecting changes plan to increase their alternative allocations in the next three years private credit looks to be the largest beneficiary of these plans to boost allocations investors widely expect the rising interest rates and deteriorating economic conditions to create lucrative investment opportunities in private credit the survey found that hedge funds were the mostfavored alternative asset class with 32 of investors expecting to hold or boost their allocations in 2022 although that was a slight decline from 2019s reading private equity venture capital was in second place at 26 in 2022 and 2019 however illiquid or private credit was the mostfavored asset class on a different measure 51 of investors expect to boost their holdings in the asset class followed by 29 in real estate and 28 in private equity investors were most likely to keep the size of their hedge fund holdings stable at 78 of investors followed by liquid credit at 70 and private equity at 64 many fund managers are addressing the growing number of opportunities by launching new products in areas like illiquid credit real estate private equity venture capital and opportunistic or special situations fund managers are also expanding their distribution of existing products to new customers including retail investors gund managers are incorporating various investing criteria within an existing strategy like adding private market investing to a hedge fund however alternative funds maintain a relatively small exposure to digital assets which make up less than 2 of managers overall portfolios managers are offering esgfocused products which investors have shown significant interest in the firm reported that public pensions endowments and foundations are many of the largest alternative investors and they have their own esg requirements to fulfill the survey found that 14 of investors are required to invest in socially responsible products while 29 currently arent but expect to be required to do so in the next two or three years fiftyseven percent arent required to invest in such products and dont expect to be required to do so anytime soon governance and climate risk are the top two areas of interest for esgfocused investors at 63 and 61 of investors respectively the biggest financial concerns facing managers and investors according to eys 2022 global alternative fund survey managers and investors both stated that their top challenge is responding to the variety of market risks the top concerns were the volatility in the public markets changing interest rates and talent management seventy percent of investors and 64 of fund managers highlighted concerns about a global recession in their 12month outlook for the economy ey observed marginally heightened concerns for global economic indicators alongside those specific to the us with 44 of managers and 55 of investors concerned about a us recession additionally 46 of investors and 39 of managers cited geopolitical shocks to the global markets as critical concerns over the next 12 months the firm said the persistent instability in the marketplace has prompted alternative fund managers to expand their horizons and look beyond navigating the global markets and economy in the short term fund managers aim to not only deliver on their commitments in the short term but also position their firms for the future over the long term fund managers are more actively planning for future succession and either have or are thinking about engaging in strategic transactions with their firms longterm viability in focus meanwhile investors are more actively engaged than ever regarding fund managers succession plans talent management has become a significant concern for both fund managers and their investors to fight the talent shortage plaguing the asset management industry fund managers are implementing a multipronged approach aimed at retaining talent through higher compensation prioritization of diversity and inclusiveness and increased flexibility job roles and responsibilities most investors said theyve been scrutinizing their fund managers talent programs even more than before with a particular focus on diversity equity and inclusion 2022 has also brought changes in workplace flexibility policies and other practices as the world starts to move into the postcovid19pandemic era fund managers are now calling on workers to return to the office and implementing more structured policies replacing the hybrid and remote work policies that were the hallmark of the pandemic looking ahead fund managers are not only focused on the growth in responsible and impact investing and the new market realities they must also prepare for an increasing number of regulatory changes and proposals that would increase their reporting requirements boosting compliance costs more than half of alternative fund managers believe their infrastructure is largely prepared for such changes should they be enacted and theyre aware of any gaps that must be addressed of course larger firms already have the resources to meet any increased reporting requirements effectively however smaller firms may disproportionately struggle to meet those higher compliance costs in the us the securities and exchange commission has proposed increasing climate disclosures for public companies although this proposal isnt directly impacting alternative funds it has caused many investors to increase their scrutiny of managers esg policies and investment criteria in response to that increased pressure fund managers are developing their own esg policies and implementing governance structures aimed at embedding esg into their decisionmaking processes for selecting investments 57 of fund managers have established a corporate social responsibility governance structure including 45 of hedge funds and 68 of private equity funds the survey also found that most fund managers are providing their esg policies and procedures on request however only 19 of hedge funds are doing so compared to 56 of pe managers fiftythree percent of fund managers are embedding esg risks including 48 of hedge funds and 68 of pe funds 26 of investors decided not to invest with a manager this year due to inadequate esg policies an increase of six percentage points from last year the firm believes this increase should be a warning for fund managers to take investors demands for increased esg focuses and reporting seriously ey warned that managers who dont take it seriously could lose out on allocations and interest from investors