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US-Based Endowment Plans Investing in Hedge Funds – January 2013

by Graeme Terry

  • 21 Jan 2013
  • HF

Endowment plans are an established investor group in the hedge fund universe and these investors continue to be one of the main sources for institutional investment in the asset class. Preqin currently tracks 495 US-based endowments which account for 12.7% of all active investors on the Hedge Fund Investor Profiles database. These investors have a median AUM of $250mn and on average include 10 investments in their hedge fund portfolios.

Endowments are typically long term, return-driven investors in hedge funds, and they have been fundamental in shaping the institutional universe over the past 10 years. Many endowments include hedge funds as a core component of their investment strategy and this investor group has an average hedge fund allocation of 19.1%. This average allocation has remained relatively constant in recent years, with the average hedge fund allocation of endowments remaining in the 18-20% range since 2008. These investors have a mean hedge fund target allocation of 19.4%, suggesting there is still scope for them to slightly increase their allocation to the asset class.

In terms of the structural preferences of US-endowments, this is split equally between direct investments and funds of hedge funds, with 34% investing solely through funds of hedge funds, 33% investing directly and 33% using a combination of the two methods. Funds of hedge funds remain popular with smaller endowment plans as they allow these investors to gain exposure to a diverse range of hedge funds with a single investment. Long/short equity remains the most popular hedge fund strategy, with 61% of endowments including this strategy as part of their portfolio. Other popular strategies include multi-strategy, event driven, distressed, macro and long/short credit.

US endowments are likely to be active in making new hedge fund investments over the coming 12 months, as they continue to see hedge funds as a core part of their investment strategy. A large proportion of endowments are operating at close to their target allocations but will continue to allocate as part of their natural portfolio turnover. California-based Pepperdine University Endowment is currently planning new allocations as it looks to invest $6-24mn in three to four hedge funds, focusing on macro and CTA strategies.

Overall, endowment plans have remained positive about the hedge fund asset class despite concerns over performance. The vast majority of the largest US endowments include a substantial hedge fund allocation and these investors are likely to remain active in the asset class over the coming year.

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