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Portfolio > Alternative Investments > Hedge Funds

Foundations Plan to Increase Alternative Investmen

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WILTON, Conn. (– A first-time survey of non-educational foundations by the Commonfund Institute shows that 23% of these organizations increased their allocation targets for alternative investments in the past year and that 31% expect to do so in the year to come.

Current allocations to alternatives were at 14% of foundation assets, slightly below the current target of 15%. “It is clear that foundations have an increasing appetite for alternative strategies for both diversification and return potential,” the Commonfund report observes.

Hedge funds are the largest component in the alternatives category, accounting for 32% of alternative assets. The alternatives category, as defined by Commonfund, also includes private equity, venture capital, equity real estate, energy and natural resources and debt strategies such as high-yield bonds and distressed debt.

The share of hedge funds in alternatives varied inversely with the size of foundation assets, with the smaller institutions relying more heavily on hedge funds for diversification than the larger ones. Foundations with US$1 billion or more in assets diversified broadly into private equity and other investments and had only 25% of their alternatives portfolio in hedge funds.

By contrast, in smaller organizations with between US$50 million and US$100 million in assets, 55% of alternative investments were in hedge funds. This number was 50% for the US$101 million to US$500 million group.

Other Differences

Commonfund reports that there were variances by type of foundation, as well. Private institutions have a much higher percentage (15%) of their total assets in alternatives compared to community foundations (9%).

But community foundations had 45% of alternatives in hedge funds, compared to 31% for private foundations. Community foundations had significantly lower percentages in private equity and venture capital but a much higher fraction in debt strategies.

Among all participating foundations, investment committees have primary responsibility for manager selection in 75%, but there is involvement by staff in 60% and consultants in 53%. The frequency of formal meetings by investment committees averaged 4.3 a year, or slightly more than quarterly.

This survey covers 230 private and community foundations with total assets of US$119 billion. It was conducted in the fourth quarter of 2002 and the first quarter of this year. Among the participants are 25 foundations with assets of more than US$1 billion and 27 with US$501 million to US$1 billion. The majority has assets between US$101 million and US$500 million.

Commonfund also does an annual study of college and university endowments. That separate survey, which has been conducted for the past three years, indicates investment trends similar to the results of the new foundation survey .

One similarity was the pattern of returns. Like school endowments, foundations did better in the bear market the more assets they had. In fiscal year 2002, foundations with US$1 billion or more lost 7.7%, but those with US$50 million to US$100 million lost 10.3%.

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