NEW YORK — Small endowments and other non-profit organizations might be more vulnerable to the risks of hedge fund investments than their larger brethren, according to new research from the Global Credit Research unit of Moody's Investors Service, New York.
That's because many smaller colleges are jumping into hedge funds with large allocations — some as large as 50% of assets — without investing enough in their own investment management infrastructure to ensure good manager selection and ongoing monitoring, according to the research.
Moody's research showed that most larger endowments — those with more than $1 billion under management — have been investing in hedge funds for some years and have gradually built up sufficient staff experience and strong investment processes.
That gradual movement into hedge funds protected these big funds on the downside when market conditions punished investors that still had a big exposure to publicly traded stocks. Smaller colleges, with their higher allocations to public stocks, were punished badly by the poor markets and now are trying to make it up through allocations to hedge funds. But they are moving far more quickly, with too much money and less skill than larger institutions with a longer track record in the asset class.
For example, the median return of the endowments of Moody's-rated private colleges and universities of all sizes was 14.4% in 1998. That median return dropped to 9.3% in 1999, jumped back up to 10.3% in 2000, and then plummeted. In 2001, the median return was -2.8% and in 2002, -7.2%. Last year, it rose to a virtually flat -0.1%.