Investors continue to direct money into private equity at the expense of hedge funds, a trend that shows no sign of slowing thanks to low interest rates and a rising stock market.

Among alternative investments — those outside of traditional stocks, bonds and cash — private equity’s market share jumped, while hedge fund investments declined, according to an Ernst & Young report published on Wednesday. 

“These market conditions have served as rocket fuel for private equity portfolios,” it said.

“Investors do not expect this trend to change over the next two to three years, having reported that they anticipate their allocation to private equity and real estate products to continue to grow.”

Socially responsible funds are also drawing demand, the report said. About a third of survey respondents said they plan to or are already investing in an ESG vehicle. The report cites an “evolving investor base” for socially responsible idemand; it also said some investors are drawn to ESG strategies out of a belief they may perform better than wider markets.

Hedge funds, which still receive the biggest share alternative investments, increasingly are being scrutinized for costs as returns in the world’s biggest funds lag the performance of broad stock markets. While still controlling about $3.15 trillion, so far this year hedge funds again trail the performance of stock markets.

Private equity, and real estate to a lesser extent, have grabbed market share of alternative investments. PE’s share jumped to 25% from 18% last year, while real estate moved to 23% from 20%. Hedge funds control 33% of the market, slipping from 40% last year.

Hedges “are quickly giving up market share,” the report said.

Private equity is raising more funds, tallying record amounts of “dry powder,” the report said. This year, it’s on track to top last year’s fundraising: PE raised $191 billion through Sept. 30, close to the $195.8 billion recorded for all of 2018, according to PitchBook.

Low volatility and interest rates, coupled with strong stock performances, will drive more investors toward PE, the report said.

  • The survey polled 209 managers and 62 institutional investors; in total they controlled $5.9 trillion in assets.