According to Preqin’s Hedge Fund Investor Profiles, foundations account for approximately 19% of the hedge fund universe and are the most numerous investor tracked by Preqin by investor type. Despite making up a significant proportion of the hedge fund universe, foundations have not been as active when it comes to recent search activity. Nonetheless, Preqin data has identified that there is a long term trend of increasing commitment and growing sophistication from foundations investing in hedge funds, and that these investors demonstrate a growing confidence in the asset class.
According to The Q3 2014 Preqin Quarterly Update: Hedge Funds, foundations accounted for a relatively small proportion of active searches in the past 12 months, given they make up a large proportion of the investor space. In Q4 2013, foundations were responsible for 2% of searches and just 1% of searches in Q1 2014. Activity picked up in Q2 2014 when they accounted for 5% of searches, but this was muted again in Q3 2014 when just 2% of searches were made by foundations. Although appearing to be passive investors, there are grounds to suggest that foundations have become more accustomed to hedge funds and appear to have grown in confidence with regards to including hedge funds within their portfolios.
Preqin data suggests that hedge fund allocations made by foundations have steadily increased over recent years. In 2011, the average allocation stood at 15.4%, in 2012 it increased to 15.6% and in 2013 to 17.4%. Currently, the average foundation’s allocation to the asset class is approximately 17.7%. Although smaller, or perhaps the lack of, dedicated investment teams may inhibit active searches, foundations appear to remain committed to hedge funds and the increase in allocation.
In addition, the graph below shows that foundations’ hedge fund portfolios have become increasingly sophisticated over recent years as more foundations appear to invest in a combination of single-manager and multi-manager hedge fund structures. In 2011, 49% of foundations invested via multi manager hedge funds, 26% used a mixture of both direct and funds of hedge funds, and only 24% held single-manager-only portfolios. In contrast, in current portfolios approximately 36% of foundations hold both funds of hedge funds and single-manager funds, 34% only utilize single-manager funds and just 30% now solely invest with funds of hedge funds. Funds of hedge funds’ strengths lie in greater diversification and outsourcing of manager selection, but they are typically associated with less experienced investors. This transition could suggest that foundations are growing increasingly more comfortable with hedge funds, or perhaps, have utilized consultants in order to build diverse portfolios to incorporate a variety of hedge fund managers.
Although foundations’ search activity has been relatively low in recent months, over the long term this type of investor has shown increasing support for hedge funds and has appeared to grow in confidence and sophistication. Looking forward, it is expected that they will continue to be an important source of capital for the hedge fund industry.