US Endowment Plans Continue to be Key Players within the Hedge Fund Space – March 2014

by Madeleine Stretton

  • 17 Mar 2014
  • HF

Preqin currently tracks 517 US-based endowment plans active in hedge funds, which accounts for 17.9% of the entire US institutional hedge fund investor universe. This is an increase on the 495 endowment plans investing in hedge funds which Preqin tracked in Q1 2013, showing that there has been continued growth for this investor type within the hedge fund space. US endowment plans investing in hedge funds currently have mean assets under management of $936mn and hold, on average, between eight and 11 hedge funds within their portfolios. Despite accounting for only 0.9% of aggregate assets under management of the whole hedge fund investor universe, US endowment plans represent a significant 10.4% of all institutional capital invested in hedge funds.

Due to their long-term time horizon, US-based endowments have been key players in the alternative assets space for a number of years and these investors continue to be key contributors of capital to the hedge fund universe. Many endowment plans have adopted the ‘Yale Model’ of asset allocation, which is typically structured with low allocations towards equities and bonds, and a more significant focus on alternative assets. Preqin’s Hedge Fund Investor Profiles shows that US endowment plans have an average target allocation to the hedge fund space of 19.3%, which is significantly higher than the 15.5% average hedge fund target allocation of all US-based institutional investors. Some of the largest US-based endowment plans include Stanford Management Company and Harvard Management Company, which have approximately $5.6bn and $4.9bn allocated to hedge funds respectively.

In terms of structural preferences, there is an equal preference between US endowment plans exhibiting a preference for direct hedge fund investments or funds of hedge funds, or a combination of the two methods. Approximately 34% of endowment plans invest solely through single manager funds, while 33% have a sole preference for funds of hedge funds and the remaining 33% will invest in both fund structures. We may see an increase in the proportion of endowment plans focusing on direct investments as endowments gain experience within the hedge fund space. A recent example of this is the University of Kentucky Endowment, which announced plans to make its first foray into direct hedge funds with assistance from one of its existing fund of hedge funds managers, Grosvenor Capital Management.

Overall, US-based endowment plans continue to be key players within the hedge fund space and these investors allocate significant portions of capital to the asset class. Over the next 12 months, we are likely to see this investor group continue to make commitments to hedge funds and the asset class is likely to remain a key component of US endowment plan portfolios as they continue to adopt the ‘Yale Model’.

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