Foundations, Endowments Reevaluating Hedge Fund Exposure, Survey Finds

Concerned with high fees, underperformance, and lack of transparency, some foundations and university endowments are reevaluating their exposure to hedge funds, a survey conducted by NEPC, a Boston-based investment consulting firm, finds.

The Q2 2016 NEPC Endowment and Foundation Poll, a measure of endowment and foundation confidence and sentiment related to the economy, investing, and market performance, found that 28 percent of the fifty-nine respondents said they had reduced or were considering reducing their allocation to hedge funds. Of the foundations and endowments that had already changed their allocation, nearly half said they redirected the funds into equities. According to the survey, 24 percent of respondents currently have zero exposure to hedge funds, up significantly from 2 percent in the Q2 2014 survey, while 23 percent put their allocation to hedge funds at between 11 percent and 20 percent of their portfolio, down from almost 40 percent two years ago.

When asked about their biggest concerns with respect to hedge funds, 80 percent of respondents cited meager or disappointing returns, followed by high fees (54 percent) and lack of transparency (37 percent). Hedge funds typically charge a 2 percent management fee and 20 percent of profits, and a quarter of respondents said they had asked for or been offered a reduced fee by their hedge fund managers within the past six months. The survey also found that half of respondents believed the U.S. economy was in a worse place than it was a year ago, while 52 percent said a slowdown in global growth poses the greatest near-term threat to their portfolios.

"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, head of NEPC's endowment and 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."