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Hedge funds and other marketable alternatives a valuable part of endowment and foundation portfolios

Wednesday, August 16, 2017
Opalesque Industry Update - NEPC, LLC, one of the industry's largest independent, full-service investment consulting firms to endowments and foundations, today announced the results of its Q2 2017 NEPC Endowment and Foundation Poll, a measure of endowment and foundation views on the economy, investing, and key market trends. The Q2 Poll also included a special focus on these investors' use of marketable alternatives, including hedge funds.

Results show that marketable alternatives are a substantial and important component of many endowment and foundations' portfolios. The responses seem to indicate that exposure to these strategies has stabilized and will hold steady for the next year.

According to the survey, two-thirds (68%) of respondents have more than 10% 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%) of respondents had at least 10% allocated to hedge funds. When asked to look ahead to the next 12 months, 65% of respondents in the Q2 2017 Poll said they plan to maintain portfolio exposure rather than modestly increase (16%) or decrease (16%) exposure.

Responses also indicate that both liquid and illiquid marketable alternatives have gained significant traction; nearly half (48%) of respondents use both, while 26% only use liquid and 13% use illiquid. When asked which types they invest in, 50% of respondents said direct hedge funds, followed by funds of hedge funds (40%), global asset allocation (32%), and liquid alternatives (18%).

"Despite some criticism about high fees, most endowments and foundations consider marketable alternatives a vital component of their portfolios," said Kristin Reynolds, 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 percent of respondents cited "portfolio diversification" as the top benefit, with 61% reporting "risk management." As for the biggest challenges of investing in marketable alternatives, respondents cited "low or disappointing returns" (76%), "high fees" (73%), and "transparency" (65%).

Investors Optimistic about the Economy, but Concerns Remain

The Q2 NEPC Poll also suggests that investors' current outlook on the U.S. economy is significantly more positive than it was a year ago. They continue, however, to monitor a slowdown in global growth, geopolitics, and political uncertainty as potential threats to investment performance. Other key findings include:

  • Nearly two-thirds (65%) of respondents think the U.S. economy is in a better place now compared to this time last year - a sizable jump from the Q2 2016 survey, when just 29% of respondents said the same.
  • Although half (50%) of respondents in Q2 2016 said they think the U.S. economy is in a worse place, just 8% of Q2 2017 respondents feel this way.
  • Thirty-nine percent of respondents believe a slowdown in global growth poses the greatest threat to their investment performance over the near term, a slight increase from Q1 2017 (five percentage points) but a substantial decrease from Q3 2016 (24 points).
  • Thirty-seven percent cited geopolitics and political uncertainty as the greatest threat to their portfolios, consistent with Q1 2017 respondents and down nine points from Q4 2016.

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