Twenty-eight percent of the 59 endowments and foundations surveyed by NEPC have lowered or intend to lower their hedge fund allocations, a study released Monday said.
By contrast, 17% of NEPC clients surveyed said they have increased or intend to increase their allocation to hedge funds and 55% said their committees aren't considering a change to the hedge fund weighting in their investment pools.
But investors surveyed in late July were not sanguine about their hedge fund portfolios, said Catherine M. Konicki, partner and head of NEPC's endowment and foundation practice.
“Everyone is looking at their hedge funds now and taking a pause,” Ms. Konicki said in an interview, noting “performance has not been great and investors are wondering whether to pare down their hedge fund portfolios.”
But facing the prospect of providing their organizations with the annual spending rate plus inflation in the face of a low-return investment environment, endowment and foundation chief investment officers continue to look to hedge funds, as well as less liquid private investments, for return.
“It depends on the size of your hedge fund allocation,” Ms. Konicki said. “If your allocation is only 15%, disappointing performance won't have as devastating an impact on the performance of your overall portfolio as a 20% to 50% weighting,” she added.
NEPC's most recent survey exposed large hedge fund allocation changes in 2016 compared with 2014 among endowments and foundations:
- zero exposure — 24% in 2016 vs. 2% in 2014
- 1% to 5% — 11% vs. 14%
- 6% to 10% — 20% vs. 18%
- 11% to 20% — 23% vs. 39%
- 21% to 50% — 22% vs. 24% and
- greater than 50% — zero vs. 2%.
As for where hedge fund assets were reallocated, 46% of those surveyed said they invested in public equities; 27% cash; 23% private equity; 19% fixed income; 12% real estate; 8% each real assets, liquid alternatives/hedge fund replication and other (multiasset strategies).