By Kate Smith, Bloomberg
The wave of endowments and foundations cutting their exposure to hedge funds is abating.
That’s the conclusion of a survey released Tuesday by Boston-based consulting firm NEPC, which caters to 106 endowments and foundations with assets totaling $61 billion. Almost two-thirds of the 62 business officers who responded to questions said they planned to maintain their current exposure to so-called marketable alternatives, while less than a third cut their total allocation to the asset class in the past year.
“We’ve seen clients reassess their hedge fund portfolios and rethink what their role is within their own funds and we feel that we’ve reached a stabilization point,” Kristin Reynolds, a partner at NEPC’s endowment and foundation research practice, said in a phone interview. Still, Reynolds said she doesn’t expect endowments and foundations to substantially increase their hedge fund exposure any time soon.
Scrutiny of hedge funds and their fees had mounted after several years of disappointing returns, prompting endowments and foundations to embrace exchange-traded funds over active management. The biggest bets in the first quarter among the largest U.S. university endowments were in passive ETFs, including four of the five biggest public purchases, which accounted for more than $1.2 billion traded, according to data compiled by Bloomberg.
In 2014, just 2 percent of NEPC’s survey respondents reported having zero exposure to hedge funds. That spiked to 24 percent in 2016. This year, the figure fell to 13 percent.
Most respondents to the survey, 76 percent, said they were concerned about low returns, a slight improvement from 80 percent last year. Those worried about fees jumped to a record 73 percent, from 54 percent in 2016. And 65 percent cited a lack of transparency, up from 37 percent.