Marketable alternatives are a substantial and important component of many endowment and foundations’ portfolios, according to the Q2 2017 NEPC Endowment and Foundation Poll, a measure of endowment and foundation views on the economy, investing, and key market trends.
The responses seem to indicate that exposure to these strategies has stabilized and will hold steady for the next year.
NEPC is one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations.
According to the survey, two-thirds (68 per cent) of respondents have more than 10 per cent of their portfolios allocated to marketable alternatives. This marks a notable increase from last year, when a similar survey conducted by NEPC in July 2016 found that less than half (45 per cent) of respondents had at least 10 per cent allocated to hedge funds. When asked to look ahead to the next 12 months, 65 per cent of respondents in the Q2 2017 Poll said they plan to maintain portfolio exposure rather than modestly increase (16 per cent) or decrease (16 per cent) exposure.
Responses also indicate that both liquid and illiquid marketable alternatives have gained significant traction; nearly half (48 per cent) of respondents use both, while 26 per cent only use liquid and 13 per cent use illiquid. When asked which types they invest in, 50 per cent of respondents said direct hedge funds, followed by funds of hedge funds (40 per cent), global asset allocation (32 per cent), and liquid alternatives (18 per cent).
“Despite some criticism about high fees, most endowments and foundations consider marketable alternatives a vital component of their portfolios,” says Kristin Reynolds (pictured), Partner in NEPC’s Endowment and Foundation Practice. “Furthermore, it doesn’t appear that the role of alternatives in endowment and foundation portfolios will be lessened any time in the foreseeable future. Investors value the benefits that alternative strategies provide, especially because of lingering concerns about the impact that global economic and geopolitical uncertainties could have on portfolios.”
The survey also examined endowment and foundation views on the advantages and disadvantages of investing in marketable alternatives. Eighty per cent of respondents cited “portfolio diversification” as the top benefit, with 61 per cent reporting “risk management.” As for the biggest challenges of investing in marketable alternatives, respondents cited “low or disappointing returns” (76 per cent), “high fees” (73 per cent), and “transparency” (65 per cent).
