Endowments remain the big tax-exempt investors in hedge funds, while pension funds, wary of losing money through unauthorized trading, are less active.
Executives at endowments like hedge funds for their return potential and because historical returns aren't highly correlated with either stocks or bonds.
Among the endowment funds that have invested with hedge funds are: Vassar College, Poughkeepsie, N.Y.; Randolph-Macon College, Ashland, Va.; Hamline University, St. Paul; and Colby College, Waterville, Maine.
Hedge funds, or private investment partnerships, are largely unregulated; they offer a myriad of investment styles that often can include the use of derivatives, leverage and short selling.
Better-known styles include top-down macroinvesting, which is notorious for taking big leveraged bets on broad themes, and long-short investing, which aims for market-neutral returns.
Among the few pension funds that have invested in hedge funds is RJR Nabisco Inc., New York.
"In our client base, recently, we're not seeing any specific interest in hedge funds," said Gary Robertson, head of alternative investments for consulting firm Callan Associates Inc., San Francisco.
As private equity investing gets more crowded, pension executives are starting to look at other alternative investment types, Mr. Robertson said. But he thinks investors will turn to other strategies first, such as oil and gas and timber, before hedge funds.
Episodes of unauthorized trading the last couple of years, such as those at the Japan's Daiwa Bank Ltd., have turned institutions off to unusual or hard-to-explain strategies, he added.
Pension fund executives want managers that can be easily tracked, and are relatively transparent, which often isn't the case with hedge fund managers.
One problem a Callan client had with a fund of hedge funds was overdiversification, he said. There were so many managers and investment styles the managers tended to cancel each other out, he said.
Mr. Robertson said hedge fund investors probably are better off focusing on a few managers with specific investment strategies that carry a strong track record, which aren't always easy to find.
One manager has seen some success finding pension clients. Budge Collins, president of Collins Associates, a Newport Beach, Calif., manager-of-managers, said his firm has experienced growth in hedge fund assets through a small number of pension fund clients. He declined to name them.
As a result, Collins' total assets in alternative strategies have grown 50% to $1.5 billion in the past year, he said.
Nonetheless, he said he had expected the growth to come quicker. "I still feel like a pioneer ...."
Donald J. Hardy, a managing director for the investment banking unit of Frank Russell Co., Tacoma, Wash., said that while there are a few pension funds investing with hedge funds, for the most part they're on the sidelines.
He said restrictions on the amount of ERISA assets a hedge fund manager can take on have limited managers' desire for pension assets.
And from a pension fund's perspective, the public markets for stocks and bonds have offered such strong returns that hedge funds appear less attractive, said Anne Buehl, a director at Darien, Conn.-based RogersCasey Associates.
Hedge fund investing has become "more mainstream" among endowments, partly because investment committee members already are familiar with the concept as high-net worth investors, she said.
Still, industry players are betting on growth in institutional interest in hedge funds. Among them: Evaluation Associates.
"We have decided to grow the business," said Patrick Moriarty, senior vice president for business development with Evaluation Associates Capital Markets Inc., Norwalk, Conn.
EACM has seen interest from pension funds whose companies are on the Fortune 100, as well as the Fortune 10.
"We've been surprised by the interest," Mr. Moriarty said, but he declined to name the pension funds.
"We believe the smart money is nibbling, and I'll leave it at that," he said.
The Common Fund, a Westport, Conn.-based manager-of-managers for endowment funds, has been a long-term investor with some of the bigger names of the industry, such as Julian Robertson, head of the Tiger Fund, and Leon Cooperman, head of the Omega Fund, both of which manage billions of dollars in hedge fund assets.
Two more endowments have invested in its fund of hedge funds, although hedge fund assets overall have held steady at around $500 million over the past 18 months, said Stephen Eckenberger, head of domestic equities there. (He declined to name the new investors.)
The Common Fund just restructured its fund of hedge funds to include a farm team of hedge fund managers that previously was in its equity fund. The farm team program is run by Barlow Partners, New York.
Mr. Eckenberger said four of The Common Fund's six hedge fund managers came from its farm team.
Data published by the National Association of College and University Business Officers show the number of endowment funds using hedge funds rising.
Sixty of the 461 institutions in NACUBO's annual endowment study had hedge fund allocations as of June 30, 1995, an increase from 54 the previous year.
The dollar-weighted mean allocation to hedge funds was 2.6%, according to the NACUBO survey, which was conducted by Cambridge Associates Inc., a Boston-based consultant to endowments.
