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Portfolio > Alternative Investments

Commonfund Study: Struggling Endowments Raise Hedg

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WILTON, Conn. (–University and college endowments in the United States have sharply raised allocations to hedge funds at a time when their overall portfolios have been battered by steep equity declines, according to a Commonfund Institute survey released Sept. 16.

The interim study, which surveyed 100 U.S. educational endowments, found that for the 12-month period ending in June, endowments looked at in the study had average annual returns of negative 5.44% over a stretch of time when the Standard & Poor’s 500 stock index dropped 18%.

The largest and smallest funds faired best when it came to returns. Endowment portfolios US$1 billion or more lost 3.4%, while portfolios of under US$10 million lost 3.1%. Mid-size endowments of US$51 million to US$100 million faired the worst, seeing returns erode 7.4% during the fiscal year.

The interim report done in advance of the 2003 Commonfund Benchmarks Study found that 29% of the endowments surveyed had altered their asset allocations patterns during the fiscal year ending in mid-2002.

Alternative investments rose to 15% from 11% for the 12-month period. Within the alternative arena, hedge fund allocations rose to 35% from 22%, while private equity allocations fell to 11% from 14% and real estate dropped to 6% from 7% with a 12% venture allocation remaining unchanged. Other allocations to alternatives by endowment investors included a mix of international private equity, natural resources, and energy.

The migration of endowment assets to hedge funds seen in the study suggested that U.S. colleges and universities were actively diversifying their portfolios during bearish market conditions, the Commonfund report said. “What this (interim) report suggests is that alternative investments, most notably hedge funds, helped diversify portfolios for endowments and added a cushion in terms of performance,” said John Griswold, executive director of the Commonfund Institute.

Endowment respondents in the study saw equity allocations decline to 47% from 50% over the last year with international equities dropping to 10% from 11% over the same period. Fixed-income holdings held steady at 28% of assets, according to the report.

Twenty-six percent of respondents increased their cash holdings over the 12-month period ending in June, while 11% decreased their cash holdings. The remainder reported no change.

“Performance for endowments on the whole has held up relatively well. Even if you took a 60%-40% split between the S&P and Lehman indexes over the same period, you would have had returns down 8% or so. And beating that by 250 basis points isn’t too bad. But you have to remember that the schools (endowments) lost 3% last year and typically are spending needs of 5%, which means that there is some real pressure to cut costs,” Mr. Griswold said.

“Some of the things that also came up in the surveys were concerns about the persisting corporate scandals we’ve all been reading about, the prospect of war in Iraq and what all of this will mean to the economy,” he said.

The interim report included about 100 endowments respondents. The upcoming 2003 Commonfund Benchmark Study is more exhaustive in its scope and includes roughly 300 endowment respondents, according to Mr. Griswold.


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