Endowments and foundations are still bullish on hedge fund strategies, with 65 per cent of respondents noting hedge fund exposure greater than 10 per cent of their total portfolio, according to the Q2 2014 NEPC Poll.
The poll is designed to measure endowment and foundation confidence and sentiment related to the economy, investing and market performance.
When asked how they consider hedge funds within their investment programmes, results were almost split evenly, with 53 per cent saying, “a separate investment class,” and 47 per cent noting, “an investment vehicle used to gain exposure within an asset class.”
“This represents the continued evolution in the way investors view hedge funds and their place within the portfolio,” says Cathy Konicki, partner and head of NEPC’s endowment & foundation practice group. “Respondents continue to display similar levels of economic optimism we’ve seen in our two previous quarterly surveys, with the majority saying the US economy is in a better place now than at the same time last year. A slowdown in global growth, rising interest rates and the potential for overseas conflict dominated the top three areas of concern for endowments and foundations related to their investment performance.”
Asked about the primary role of the hedge funds within their portfolios, 39 per cent of respondents said “diversification,” 22 per cent noted “volatility mitigation,” and 18 per cent cited “absolute return.” Thirty-five percent of endowments and foundations access hedge funds directly, 35 per cent use a combination of direct investment and funds-of-funds, and 29 per cent use only hedge funds-of-funds.
Asked what major factors drive their hedge fund selection, 69 per cent said “correlation and fit within the portfolio,” 53 per cent noted “compelling investment thesis,” and 43 per cent said “track record.” “Fee structure,” “operational proficiency,” and “size of fund” rounded out the last three selection imperatives. The reason cited by 26 per cent of endowments and foundations for replacing a hedge fund manager was “organisational concerns,” followed by “performance concerns” (24 per cent) and “moving from funds-of-funds to direct investments” (21 per cent).
While 35 per cent of respondents indicated no preference around the preferred size of hedge fund managers, as measured by assets under management, 65 per cent indicated a penchant for strategies with less than USD5 billion in assets under management. These responses highlight that many investors believe that smaller hedge funds will likely be more nimble which will drive higher returns.
Over 30 per cent of respondents felt that emerging markets equities hedge fund strategies were most likely to generate the highest returns over the next five to seven years, followed by multi-strategy and event driven. Interestingly, return expectations for credit strategies, which achieved outsized returns post 2008, have been reduced significantly relative to other strategies.
