Foundations have become a core institutional investor group in the hedge fund universe and the number of these investors active in hedge funds has been steadily increasing in recent years. Preqin’s Hedge Fund Investor Profiles database currently tracks more than 650 US-based foundations active in the hedge fund asset class. These investors have an average current hedge fund allocation of 16.9% and a mean target allocation of 18.8%, showing that there is scope for these investors to further bolster their hedge fund exposure.
Foundations typically aim to invest in a variety of hedge fund strategies in order to develop a diversified portfolio. Long/short equity is by far the most common hedge fund investment strategy sought by foundations, with 78% of investors indicating an interest in this approach. Other popular strategies include multi-strategy funds (61% of US-based foundations on Preqin’s database indicate an interest), event driven (40%), and distressed (37%). Portfolios may also include exposure to long/short credit (24%), relative value arbitrage (22%), macro (22%) and risk/merger arbitrage (16%). The majority of US-based foundations favour investing with hedge fund managers based in the US but most will gain global exposure from their underlying investments.
Foundations tend to favour established hedge fund managers with a strong track record and only 29% of US-based foundations currently invest in emerging managers. Popular hedge fund managers amongst foundations include Farallon Capital Management, Och-Ziff Capital Management and King Street Capital Management. A number of foundations prefer to gain exposure to hedge funds via funds of hedge funds and popular managers include TIFF, Forester Capital and Evanston Capital Management. Overall there is a fairly even split between the structural preferences of US-based foundations, with 31% investing in hedge funds directly, 33% investing via funds of hedge funds and 36% using a combination of both methods.
There is plenty of evidence to suggest that hedge funds will continue to remain a core constituent of US-based foundation’s hedge fund portfolios. Community Foundation of Broward has recently returned to the hedge fund asset class, allocating 15% of its total assets to a spate of new hedge fund hires. Meanwhile, Wisconsin Alumni Research Foundation plans to commit $150mn to 2-4 hedge funds in the next 12 months. Foundations remain confident in hedge funds as a tool for diversifying their portfolios and they are likely to continue making investments in the asset class over the next 12 months despite concerns over hedge fund performance.
US-based foundations will continue to be active in hedge funds over the next year and these investors can be a key target for fund managers due to the sheer number of them investing in the asset class. Foundations have been increasing their allocations to hedge funds in recent years and there is the potential for this to grow further, with some investors reporting an unfulfilled target allocation to the asset class.