Preqin currently tracks 419 endowment plans that are currently investing in hedge funds or considering making their first investment in the asset class. Of these 94% are based in North America, 5% in Europe and 1% in Asia and Rest of the World.
Typically endowments are long-term, return driven investors and these have been fundamental in shaping the institutional universe over the last ten years. In terms of structural preferences there is almost an equal split of those who make all of their investments directly through single managers, those who invest through funds of hedge funds and those that use a combination of both methods. Single manager funds are typically preferred by the larger endowment plans while funds of hedge funds remain attractive to smaller investors who do not have the resources to actively manage a hedge fund portfolio. The most popular hedge fund strategy amongst endowment plans is long/short equity with 41% of investors indicating a preference for this strategy. Other popular strategies include multi-strategy (24%), macro (24%), event-driven (21%) and distressed securities (18%).
The average allocation of endowment plans has remained relatively constant over the last few years in the range of 18-20%. Many of these investors have reached their optimum level of investment but they continue to look for new hedge fund opportunities on an opportunistic basis. As endowments tend to be long-term investors they are typically more willing to accept longer lock-up periods. On average they will accept lock-ups of more than 2 years; however this is steadily decreasing as investors now have more stringent guidelines in terms of transparency and liquidity following the credit crisis. On average endowments expect hedge fund managers to have a track record of at least three years. However 34% of endowment plans on the Preqin database have stated that they are willing to consider emerging managers should they demonstrate the necessary credentials.
Endowments have been fundamental in shaping the institutional hedge fund universe and they are likely to continue to play a big role over the next few years. The majority of large endowment plans in the US include hedge funds as part of their investment strategy and these investors remain enthusiastic about the benefits that hedge funds bring to their portfolio.