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US-Based Foundations Investing in Hedge Funds

by Graeme Terry

  • 03 Oct 2011
  • HF

There are 396 US-based foundations that are actively investing in hedge funds. On average these investors currently allocate around 16% of their total assets under management to investments in hedge funds and many have plans to invest further, both over the next year and in the longer term. Foundations are typically long-term investors; as a result they are willing to accept longer lock-up periods and tend to favour more experienced managers. Only 10% of US foundations would consider investing in emerging managers and less than 4% would seed a new fund.

Funds of hedge funds remain popular among US foundations, with almost 50% of foundations investing solely through this structure. This is particularly true for smaller foundations which do not have the necessary resources to construct their own single manager hedge fund portfolio. Strategically long/short equity remains the most popular strategy among foundations in the US, with 48% of investors indicating this as a strategy preference. Other popular strategies include multi-strategy with 33% of investors, absolute return (21%), distressed securities (18%), event driven (17%) and macro (16%). Foundations typically look to invest in hedge funds in order to add diversification to their portfolios and to reduce risk.

As foundations have a longer-term investment outlook they tend to maintain a fairly consistent portfolio of hedge funds and as a result many take an opportunistic approach to hedge fund investing. However there are several US foundations that are looking to make new hedge fund investments over the next 12 months. American Legacy Foundation is looking to expand its portfolio to include emerging market managers and other uncorrelated niche strategies. In addition a number of other foundations are looking to increase their exposure to the asset class in 2012 despite some hedge funds underperforming in 2011.

Foundations remain enthusiastic about the benefits of hedge funds and feel that they are a vital tool for adding diversification to their portfolio. It is expected that foundations will continue to be active in hedge funds over the next 12 months and there is the potential for many to increase their exposure to the asset class.

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