In July 2024, the University of Connecticut endowment made a bold move: it decided to drop the majority of its hedge fund investments and replace them with buffer exchange-traded funds.
Now, nine months into the change — amid volatile market conditions stemming from President Trump’s tariff policy — David Ford, chairman of the investment committee of the UConn foundation that runs the endowment, said the change is working.
“I would certainly argue they’re doing exactly what they were put there to do,” Ford said of the ETFs that are managed by Innovator Capital Management.
Ford, a 1988 graduate of UConn, said the turn away from hedge funds was aimed at simplifying something historically and extraordinarily complicated, while using a defined outcome instrument with minute-to-minute liquidity.
When the switch was announced, his inbox was flooded with emails.
“We didn't do this because we thought this is where the puck is going, although this is clearly where the puck is going,” he said. “We did it because of simplicity. We can understand it. Our IC (investment committee) can wrap their minds around it. It's easy to execute … we regain liquidity, which is enormous for an endowment.”
UConn’s endowment returned 12.1% in the fiscal year ending June 30, 2024. And Ford has now introduced an annual rebalance of the public markets portfolio. The endowment had approximately $650 million in assets at the end of February.
Running an endowment
Ford joined the investment committee seven years ago and was appointed chair in November 2023.
He comes from a hedge fund background. Ford built out the distressed credit business at what was then known as Och-Ziff Capital Management along with a stint at Satellite Asset Management, a George Soros spinout, before starting his own hedge fund, Latigo Partners, in 2005 along with David Sabath. They ultimately sold the firm’s fund business in 2020.
When Ford took over the chairman role, an industry colleague at a large university endowment suggested he read former Yale University CIO David Swensen’s book.
“He created this endowment model, this sort of mythical asset allocation, which produced spectacular returns,” Ford said. “Part of the reason, though, was that there were so many fewer quote alternative asset managers that there was still a tremendous amount of alpha to be gained in that space.”
Ford argues that what used to be alternative, is now mainstream.
“We sat back and said, ‘Well, what would an updated version of this look like?’ One of the things that we realized was, if you're overpaying fees, recapturing those fees is the first and easiest way to add alpha to the foundation, to the endowment’s return.”
When Ford took over as chairman, the endowment had a customized hedge fund basket and several direct allocations. Ford and his team took the idea of bifurcating hedge funds into components of alpha generation and hedging and asked if they could take hedging onto their balance sheet. That’s where the idea of buffer ETFs came from.
Buffer ETFs offer investors the ability to get broad market exposure with caps and have a built-in buffer against losses, typically using options, over a certain outcome period.
“Now, if you took one of those ETFs and you broke it apart into its component pieces, there's a lot of math, there's puts, there's calls, there's time involved, that sort of thing. We didn't have the ability to do that sort of sophisticated hedging with options ourselves,” he said.
The endowment currently has just under 10% allocated to buffer ETFs.
When asked why they chose buffer ETFs instead of adjusting risk management internally, Ford replied, “Small team. Buffers give us defined outcome. Daily liquidity. Takes the risk of trading options ourselves off the table. It's basically single-ticker hedging, that is, as a hedge fund guy, that's a home run.”
Ford works with a team of three and is also advised by Stepstone Group on its private portfolio and Kiski Group advises on public markets and risk management.
“We're having a tremendous number of conversations with institutions around buffers,” said Kevin Becker, CEO and co-founder of Kiski. “These products became 5 years old right around when UConn went public with saying, ‘we're putting these in our portfolio,’ which means they've got enough institutional track record for people to consider them.”
Defined outcome ETFs have grown rapidly in recent years. Assets stood at $62.1 billion at the end of February 2025 with 388 products across a 11 issuers, according to data from Morningstar.
Innovator buffer ETFs typically have an expense ratio of 0.79%, according to public information on their website. That compares to hedge funds which typically charge a 2-and-20 fee structure — a 2% management fee and a 20% performance fee.
The endowment still has three funds among its investments that are legally structured as hedge funds, but they are used for long-only investing. Ford declined to name the managers.
The custom hedge fund basket was completely eliminated and is now approximately 95% redeemed, Ford said.
The portfolio of hedge funds that was redeemed was earning a blended 7%, Ford said. “To pay 2-and-20 to get seven … that’s where my issue comes in,” he said.
Ford’s own hedge fund background gives him unique insight.
“I think what we did, you will see more and more people doing. I do believe that there are a number of great hedge funds. And by that, I mean funds that are hedging and are doing what historically they used to do. I think there are a number of tremendous stock pickers who have a hedge fund compensation scheme, and we kept a couple,” he said.
In the search for alternatives, the endowment also took a 2% position in bitcoin held through ETFs, Ford said, adding they placed strict risk management parameters around it and trim the position if it rises.
Not the first
Over the years, some institutional investors have severed their ties with hedge funds.
Famously in 2014, the $527.9 billion California Public Employees' Retirement System, Sacramento, announced it was dumping its $4 billion hedge fund allocation. A spokesperson for CalPERS confirmed that of its two legacy hedging programs, one has closed and the other is winding down.
“We do not have any active hedge fund strategies,” the spokesperson for CalPERS said in an email to P&I.
Institutional inertia means it can be difficult for allocators to get rid of asset classes after they’ve adopted them, said Andrew Beer, co-founder of DBi, a firm that focuses on hedge fund replication in products including ETFs and UCITs funds. Beer started his career in the hedge fund industry.
“To me what UConn represents, there is an old guard of allocators who pick hedge funds and have always picked hedge funds and if they have their way will always pick hedge funds. There are, though, allocators who oversee the whole portfolio who ask the hard questions, ‘should they investing be in a hedge fund structure?’” he said, adding that “It may be a great answer for small endowments, but how do you convince allocators to give up their favorite toys?”
Beer, who has worked in the hedge fund replication space for 15 years, argues there are different views around ETFs.
“Outside of the institutional world, if you say you can get exposure in an ETF with lower fees and transparency, it’s viewed as a positive thing. In the institutional world, it’s viewed as an existential threat,” he said.
Bob Elliott, co-founder, CIO and CEO of Unlimited, which offers ETFs that aim to replicate hedge fund returns, said the vast majority of institutional investors are stuck with the question of “do hedge funds justify the fees that they’re charging?” Elliott previously spent over 13 years in the hedge fund industry at Bridgewater Associates.
“There are obviously a small set of high-performing funds that in some ways, based upon their back history, justified, or appear to justify, the fees that they're charging. But for the vast majority of funds, 98% of the funds you know, fees at the level that they're seeing just don't make sense relative to the overall returns that they're getting,” he said.
But Elliott thinks that buffer ETFs are “a terrible deal for the vast majority of investors” due to additional fees paid on them and tax gains that can make for a negative expected value relative to just holding stocks and cash. He says there is a benefit to having some certainty with buffers, but the question is the premium investors are willing to pay.
Elliott has seen greater interest over the last 24 months from institutional investors, particularly public funds with fee sensitivity, looking at alpha-oriented ETFs. “They don't want to be in the papers about paying hedge fund billionaires billions of dollars in fees,” he said, adding that liquidity is also a key point. He expects more pension funds to look at hedge fund style ETFs.
Ford said UConn looked at hedge fund replication ETFs, but found the expense ratios of the funds they surveyed to be slightly higher than buffer fees and that buffers delivered higher returns at lower volatility and drawdowns.
Ford admits he is the first to say that five- to 10-year data increments are needed to see if the new approach UConn has taken will be a successful one.
Ford says hedge funds should be thinking about moving to performance over a hurdle as a better way to align interests. (Institutional investors, led by the $200 billion Texas Teacher Retirement System, Austin, started a push last year demanding that hedge funds implement cash hurdles in incentive fees.)
“I think given the amount of assets in the institutional world, there's no shortage of opportunities that are out there,” Ford said. “And so I think that people can afford to be more fee conscious. Should be more fee conscious.”
