Undeterred by the highly publicized poor performance of hedge funds earlier this year, institutional investors have put $100 million or more into the instruments in recent months.
Among the recent moves and the amounts are: Northeastern University, $20 million; Clark University, $16 million; University of Miami, $15 million; University of North Carolina, $12 million; Michigan State University, $12 million, including distressed securities; Hamlin University, $5.3 million; Colby College, about $7 million; American Jewish Joint Distribution Committee, $4 million; Lafayette College, $3 million; and Norwich University, $1 million.
In addition, Oberlin College, Case Western Reserve University and the University of Iowa Foundation hired hedge fund managers but did not disclose allocations.
Endowments and foundations in particular have been attracted by the possibility of high absolute returns and low correlation to traditional investment markets.
Because of the growth of interest, the Common Fund, a manager used by many endowments, started a fund in the spring to invest in hedge funds run by others, including such well-known hedge fund managers as Julian Robertson's Tiger Management L.P.
Pension funds, in contrast, have largely stayed on the sidelines, keenly watching but mostly not yet ready to invest.
"Pension funds generally have not taken a plunge to the hedge fund arena" because of fiduciary concerns, said Gary W. Robertson, investment consultant and head of alternative investments at Callan Associates Inc., San Francisco.
Hedge fund attractions
Investors and consultants say the attraction of hedge fund managers lies in their historically high returns and their potential for a lower correlation of returns with traditional stock and bond management, reducing the overall volatility of an institution's total portfolio.
"We've been gradually increasing our allocation to hedge funds on the theory that they won't mirror the stock and bond markets and that they will tend to reduce the overall volatility of our portfolio. Maybe this (hedge fund) category will be counter-cyclical," said J. Fred Weintz, Norwich trustee and chairman of its investment committee.
Cambridge Associates Inc., a Boston-based consultant, has been behind many of the hirings, recommending hedge funds to its clients, which are largely endowments.
Cambridge assisted in hedge fund searches for Norwich, Michigan State, the University of North Carolina, Lafayette College and Case Western Reserve.
Cambridge also reportedly was hired by Northwestern Memorial Hospital, Chicago, which is looking to put $17 million into alternative asset classes, including hedge funds, for its $535 million in trust funds.
Cambridge officials declined comment.
But not all of Cambridge's clients are making a move into hedge funds.
Jerry Berenson, associate treasurer at Bryn Mawr College, Bryn Mawr, Pa., said officials for the $240 million endowment decided against the move.
He said it was "hard to understand what they (hedge funds) do," resulting in Bryn Mawr officials not getting very far into the process. Bryn Mawr has, and is considering, other types of alternative investments, he said.
Common Fund connection
But interest is growing. Endowment fund executives, such as Norwich's Mr. Weintz, are enthused about investing in hedge funds through the new hedge fund started by the Common Fund. Its executives are seeing a jump in demand, said Robert E. Shultz, senior vice president.
The Common Fund has used at least one hedge fund manager in its regular equity fund-of-funds since 1983. But a separate hedge fund program was added to allow endowments to set their own hedge fund allocations, Mr. Shultz said.
As of the end of March, 13%, or about $500 million, of the Common Fund's $3.8 billion equity fund was invested in hedge funds. The equity fund employs three hedge funds directly - Steinhardt Partners L.P., Tiger Management and Omega Capital Partners L.P., and one fund-of-funds manager, Barlow Partners, all of New York, he said.
The Common Fund's separate program employs the same three hedge funds, plus three others using defensive strategies.
Mr. Shultz declined to name the other three because he said they are relatively less known. He said they are hedge funds managers in more of the traditional sense, in that they are not making bets on the direction of the market but are instead long and short almost entirely U.S. stocks. All three of those managers had positive returns through May, he noted.
Even the Common Fund's relatively large allocation of $500 million to hedge funds is a small part of the hedge fund universe.
The total assets of U.S. hedge funds is probably in the $120 billion to $160 billion range, spread out among as many as 3,000 funds, said George P. Van, chairman of International Advisory Group Inc., a Memphis, Tenn., consultant that tracks hedge funds and their performance.
That estimate is made using a broader definition of hedge fund, meaning a U.S. private partnership investing in marketable securities. One could narrow that definition to about 78% of that number by looking only at funds that have the ability to sell short, Mr. Van said.
Pension fund reluctance
Pension funds would have no problem creating a presence in that market. But fiduciary concerns, a fear of the unknown and a natural slowness to act have kept pension funds largely out of that arena.
Callan's Mr. Robertson cited a number of reason why pension funds have, except in a few cases, stayed on the sidelines.
Hedge funds generally have a very open mandate, he said. "Essentially, they say, you give us your money and we'll do what we want with it to make money," Mr. Robertson said. "From a fiduciary standpoint, that would be a hard thing to justify. There isn't really an investment mandate to which you can hold managers and to monitor.
"With endowments and foundations, they are investing their own money. They are accountable only to themselves, whereas (pension funds) are held responsible to beneficiaries," Mr. Robertson added.
"That's a big hurdle - the biggest reason, I'd say, why pension funds tend to stay away from hedge funds."
But some endowments and foundations are attracted to hedge funds for the fiduciary inhibition to invest and the accompanying high returns.
"We like the flexibility and global approach, and their ability to move among many markets," Douglas E. Reinhardt, Colby College treasurer, said at the time he confirmed his fund's hirings.
Endowments and foundations have a history of moving into new types of investments quicker than pension funds, Mr. Robertson said.
James Collins, executive vice president and treasurer of Clark University, noted that endowments have a somewhat longer time horizon and may "get paid for the illiquidity of the investment." Hedge funds often can only be redeemed on a monthly or quarterly basis.
Another obstacle to pension fund use of hedge funds is tied to the nature of U.S. private equity partnerships.
In order to remain free of investment company regulation, private partnerships are limited by the type and number of investors, and cannot market themselves.
They are also limited to keeping pension-related assets to just 25% of their total, unless the hedge fund wants to fulfill some "burdensome reporting requirements," Mr. Robertson of Callan said.
Donald J. Hardy, director-Russell Private Investment Services, a unit of Frank Russell Co., Tacoma, Wash., said pension funds are "conspicuous by their absence."
Russell has a $100 million fund of hedge funds that is used mostly by high net-worth individuals, family offices, endowments and foundations, he said.
But hedge fund returns may be more than plan sponsors can resist. Russell expects returns on hedge funds to be 15% on average over the next three to five years, which is close to 50% higher than what Russell expects from stocks, Mr. Hardy said.
That expected return is near what IAG, the consultant, shows hedge performance to be historically. From the second quarter of 1989, the average hedge fund returned 14.3%, using non-dollar weighted averages. During that same period, the average standard deviation of returns was 14.4%, according to IAG.
And shorter term, despite a barrage of negative publicity earlier this year, hedge fund managers performed relatively well through March. According to IAG, the average hedge fund returned -1.3%, while for the same period the Standard & Poor's 500 Stock Index returned -3.79% and the Salomon Brothers Broad Bond Index returned -2.8%.
Those aggregate returns mask a wide divergence among the 13 groupings of hedge funds IAG uses. Returns for large "macro" funds, which tend to be global and use a top-down style of management based on worldwide economic changes, were down 5.5% in that period, according to IAG. Short selling and distressed securities hedge funds, meanwhile, returned 2.1% and 2.9%, respectively.
"If hedge funds are here to stay, it's possible you will see pension funds get in them as an alternative investment strategy," Mr. Robertson said.