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Hedge Fund Investor in Focus: US Endowment Plans

by Amy Bensted

  • 11 Oct 2010
  • HF

Historically, endowments have been an important source of capital for hedge fund managers, and due to their early entry to the asset class they have become one of the most sophisticated institutional investor types. The majority of endowments are based in North America and are mainly academic institutions such as colleges and universities. The largest endowment in the US is run by Harvard University; it manages around USD 27 billion in total assets, 16% of which is allocated to hedge funds.

US Endowments invest in hedge funds as a means of diversification as well as growth, but most importantly for the preservation of capital for future generations. On average, endowments invest around 20.5% of their total assets under management in hedge funds, which far exceeds other investor groups. Many US endowments allocate sums far greater than even this – for instance Mount Sinai School of Medicine Endowment currently has three-quarters of its assets under management at work in the asset class. Endowments invest with absolute returns as their framework, and pioneer investors such as Yale and Harvard have paved the way for other endowments to invest heavily in alternative assets.

The majority of US Endowments prefer to invest in hedge funds through direct hedge fund vehicles; however a smaller proportion, 34.5%, holds investments in funds of hedge funds. Unlike many institutional investors, US endowments generally have the expertise and internal resources required to develop and maintain a hedge fund portfolio through direct investments. They can seek to tap into the best sources of alpha while avoiding the extra layer of fees associated with funds of funds.  Long/short equity and macro are popular strategy types for US endowments, as well as CTA, multi-strategy, distressed and event driven.

Nearly 60% of US endowments have a preference for investment in North America. There are many benefits of investing domestically: the close proximity to their managers makes due diligence easier, and there is greater choice of funds. Over half of all US endowments will invest globally; their experience in hedge fund investing has made them more confident to search for managers outside their domestic reach, which enables them to find the best opportunities from across the globe. Over a fifth of US endowments on the Preqin database have a specific interest in Asia and Rest of World hedge funds.

Endowments based in the US will continue to be a relevant source of capital for all types of hedge fund manager. With high allocations to the asset class, endowments make many new investments in hedge funds each year in order to complement their existing portfolios. For example the $3.2 billion California Endowment has plans to increase its allocation to hedge funds in the next 12 months, and the $432 million Davidson College Endowment will be seeking an additional three hedge fund managers over the next year.

There are 332 US endowments on Preqin’s “Hedge Fund Investor Profiles” database. Please click here for information on these endowments and to organise a demo with our client service team.

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