Back to School: Endowments pull back from hedge funds

Almost 30 percent of endowments and foundations have slashed their hedge fund allocations or plan to do so, a survey by consultant NEPC says.

More than three-quarters of the institutions that reduced their holdings pegged their decision to low or disappointing returns, NEPC found. More than half, 54 percent, indicated high fees also played a role.

The respondents’ concerns mirror those of many public pensions, some of which reduced or eliminated their hedge fund portfolios in the past two years.

Earlier this month, the New Jersey State Investment Council voted to halve its allocation to hedge funds. California Public Employees’ Retirement System and New York City Employees’ Retirement System decided to eliminate their hedge fund portfolios.

Redemptions are pressuring hedge fund managers. Investors pulled $20.7 billion from hedge funds in June. Tudor Investment Corp, led by billionaire Paul Tudor Jones, recently let go 15 percent of its workforce after investors withdrew $2 billion from the firm, Bloomberg reported.

“We’ve seen fees come a little bit under pressure, [but] not like in the public space. … [Endowments] and foundations are willing to pay the cost, if you’re getting the returns,” said Kristin Reynolds, a partner with NEPC’s philanthropic and private wealth consulting practice. “Compressed performance is really driving the fee component.”

Roughly a quarter of the institutions NEPC surveyed no longer invest in hedge funds. In a 2014 version of the same survey, just 2 percent of endowments and foundations held no assets in hedge-related strategies.

Those findings run contrary to NEPC’s own experience with foundation and endowment clients, all 118 of which remain active in the space, Reynolds said. NEPC has not advised clients to remove hedge funds from their allocations.

“That was a surprising result for us, surprising enough we thought we’d made a mistake when we inputted the data,” she said. “We don’t see it as a trend. What we postulate is that people who have reduced their allocations may have self-selected into the survey just to see the results.”

Even so, more than half the endowments surveyed hold less than 11 percent of their assets in hedge funds, NEPC found. Two years ago, the same survey found that almost two-thirds of endowments held 11 percent to 50 percent of their assets in hedge fund strategies.

“People are reviewing their hedge fund allocations,” Reynolds said. “People may be taking some money off the table in their hedge fund mandate.”

Action Item: To find NEPC’s survey, visit www.nepc.com