NEPC, LLC, one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations, recently published the results of its Q2 2016 NEPC Endowment and Foundation Poll, a measure of endowment and foundation confidence and sentiment related to the economy, investing and market performance. The Q2 Poll included a special focus on how endowments and foundations view hedge funds. Respondents cited strong concerns about high fees, underperformance and transparency.
“While hedge funds play an important role in many institutional portfolios, the last several years have been difficult for the industry and investors are starting to look very closely at how hedge funds can work for them,” said Cathy Konicki, Partner and Head of NEPC’s Endowment & Foundation Practice Group. “These survey results are by no means indicating a mass exodus from hedge funds, but they do point to greater pressure being felt by the industry as a whole.”
According to the survey, twenty-four percent of respondents cited having zero exposure to hedge funds, which is a significant increase from the Q2 2014 NEPC Endowment and Foundation Poll, when only two percent of respondents reported having no exposure. And while 39% of respondents in the Q2 2014 Poll had 11-20% of their portfolio allocated towards hedge funds, in the Q2 2016 survey only 23% had the same allocation.
Another concern cited by endowments and foundations was hedge fund fees. A quarter of survey respondents have asked for reduced fees or been offered reduced fees by their hedge fund managers within the past six months. When asked about the biggest challenges they face with their hedge fund investments right now, High Fees was the second highest response (54%), topped only by Low/Disappointing Returns (80%). Rounding out the top concerns was Transparency (37%).
Despite these concerns, the survey did highlight some positive findings for the hedge fund community. While 28% of endowments and foundations said they’ve either reduced or were considering reducing their allocation to hedge funds, 55% are not actively discussing this with their investment committee, and nearly a fifth of respondents (17%) have either increased or were considering increasing their allocation to hedge funds.
As for which hedge fund strategies respondents are most bullish on, 36% think Multi-Strategy hedge funds will generate the highest returns over the next three to five years. Other top results to this question include Long/Short Equity (33%), Global Macro (25%) and Credit (22%).
“This survey tells us that endowments and foundations are frustrated with hedge funds but they’re not giving up on them, and with several global concerns on the horizon, many investors may be looking towards hedge funds to protect their portfolios,” said Konicki.