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The demand for alternative investments is shifting away from hedge funds toward private equity and other alternatives, according to a new survey.

The latest edition of Ernst & Young LLP’s (EY) survey of institutional investors and alternative managers found that, while the overall demand for alternative investments remains stable, asset allocation preferences are shifting.

In particular, EY reported that assets under management (AUM) for hedge funds is down by 7% compared to a year ago, and allocations to private equity (PE) has increased by 7%. It also said that investors are increasingly interested in alternatives such as private credit, infrastructure and real estate.

Amid these shifting investor appetites, the survey found that both hedge fund managers and PE managers are prioritizing asset growth, but that hedge funds are more sensitive to the need to control costs.

EY reported that half of hedge fund managers rank cost management and rationalization as top priorities, compared with just 29% of PE managers.

Conversely, PE managers are focusing on beefing up their processing capabilities to support AUM growth.

In terms of attracting assets, alternative managers are also embracing more environmentally and socially responsible investing approaches to meet growing demand for ESG products, the survey found.

While only 19% of hedge fund managers currently offer ESG products, that’s expected to grow by 50% over the next two years, EY reported.

EY noted that 66% of PE firms have already adopted their own in-house environmental and social responsibility policies, and an additional 8% of firms are planning to adopt these sorts of policies. Hedge funds are further behind in this regard as well, with around half of firms adopting or planning to adopt these kinds of policies.

PE firms are also ahead of hedge funds when it comes to gender diversity within their own operations, the survey found, but there’s work to be done throughout the alt industry at improving diversity. The survey found that only 30% of alternative firms have diversity targets, and 88% of hedge and PE funds report that their front-office staff is less than 30% female.

“The entire alternatives industry has a way to go to build a balanced workforce. The managers who accelerate progress are not only role models to the industry, but are creating a competitive advantage,” said Natalie Deak Jaros, partner with EY, co-leader, EY Global Hedge Fund Services and EY Americas Wealth & Asset Management Services.