US non-profits increase allocations to hedge funds, yet private markets remain key

Non-profit investing

Non-profits in the US are allocating more to hedge funds, yet private markets remain a favourite, according to TIFF Investment Management (TIFF), an outsourced chief investment officer (OCIO) serving the non-profit sector. 

Suzanne Dugan, Investment Specialist, Diversifying Strategies at TIFF, said the company has seen an uptick in hedge fund interest in the RFPs of its clients. Dugan added that though the last five years have seen a “constant interest in the hedge fund space from non-profit clients”, they are now asking more questions about hedge fund investment due to concerns over low bond yields.  

Jay Willoughby, CIO of TIFF, said: “With yields on all types of fixed income somewhere near all-time record lows, investors have been forced to think more about alternative allocations designed to replace some of the historic attributes fixed income allocations provided.” 

He commented that many investors have identified hedge funds as providing more predictable returns than most other asset classes, downside protection in the event of equity market pullback, and some amount of liquidity, should rebalancing opportunities surface.  

“All in all, because the expected forward return of hedge funds exceeds that of fixed income by a fairly wide margin, more investors are choosing to allocate marginal capital to hedge funds,” he said.  

Willoughby added that the source of hedge fund allocations that TIFF advise on is from fixed income or other more diversifying allocations, or from the equity allocation of investors who are attempting to moderate the overall risk of their portfolio. 

TIFF is an OCIO advising non-profits across the US. Its client base is made up of education-related institutions (36 per cent) and public benefit institutions (29 per cent), but also private foundations (22 per cent), community foundations (6 per cent), healthcare-related institutions (4 per cent) and cultural/historical institutions (3 per cent). 

Dugan explained that TIFF has a “non-traditional” hedge fund investment strategy, leading it to explore certain types of strategies. The TIFF hedge fund team first identifies an attractive space for their clients, then researches the hedge fund managers who are specialists in that area. The team seeks out asset classes and sectors that either exhibit asymmetry, such as SPAC’s, CCA’s, or show inefficiencies because of the nature of the other market participants, such as Canadian mid cap or global healthcare.

This approach has recently led TIFF to research the mandatory global carbon allowance asset class, and managers specialising in the energy transition. They also identified Europe and peripheral Europe as an attractive hedge fund strategy.  

Finally, though interest in hedge funds has been strong, private markets remain the most popular asset class with TIFF’s clients, with private equity products such as venture capital increasingly in demand.  

Willoughby said he expects that over time private markets investments will outperform public market benchmarks. He sees the benefits of private equity over public equity to include managers’ ability to only invest when they find a compelling opportunity, the ability to bring operational and capital structure improvements to bear on the target company, and the ability to sell when valuations are compelling.  
 
“Increased private equity allocations are typically funded from public equities or from other asset classes when an investor is becoming more aggressive in their posture,” he added.