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Medium-Sized Health Care Organizations Favor Hedge

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WILTON, Conn. (–Hospitals and health care systems with US$500 million to US$999 million in assets have higher percentage allocations to hedge funds than smaller or larger organizations, according to a first-time survey of these institutions by Commonfund.

This new annual study of 152 public and private hospitals and health care systems with combined assets of US$78.4 billion covers the 12 months from December 2001 to December 2002. It shows that the US$500 million to US$999 million group has 14% of operating fund assets in alternatives, and within alternatives, 61% of the investments are in hedge funds.

These organizations’ defined benefit pension plans, invested separately, are 18% in alternatives, and hedge funds constitute 67% of those assets. Institutions in the next middle grouping, with US$200 million to US$499 million in assets under management, also had a relatively high percentage of alternatives in hedge funds.

By comparison, 152 organizations taken together have 9% of operating funds in alternatives. Of that, 55% are in hedge funds. Among all institutions’ pension funds, 8% of assets are in alternatives, and hedge funds make up 54% of this category.

Commonfund surveys of university and college endowments also show that a large and probably a growing percentage of those institutions’ alternative assets consist of hedge funds Previous HedgeWorld Story.

Funds of Funds

Overall, significant numbers of health care organizations have alternative investments. For operating funds, 70 survey respondents had alternative assets. But this number was smaller for pension pools: Only 44 respondents invest pension money in alternatives. Many health care institutions report that they use funds of funds, reflecting their own limited experience in alternatives.

Debt strategies, including distressed debt and high yield, are shown as a separate category within alternatives. These account for 7% of operating fund assets for the whole group. After hedge funds, the largest items in alternatives are equity real estate at 16% and private equity at 13%.

The largest institutions, defined as having more than US$1 billion in assets, invest more of their alternatives allocation in private equity. This accounts in large part for the smaller share of hedge funds for this bracket. Among the more than-US$1 billion organizations in the survey, 21% of operating pool alternative investments is in private equity and another 11% is in venture capital.

Many health care institutions invest insurance reserves as a pool separate from their operating funds and pension plans. In this survey, 47% kept reserves as a separate fund, but 28% included reserves in the operating fund.

Presumably because a high degree of liquidity is desired for reserves, only 12 organizations reported allocations to alternatives from these pools. Only 3% of reserve assets are alternatives. Hedge funds account for 23% of these, while equity real estate accounted for 37%.

Of respondents’ total assets, 66% are held in operating funds, 28% in defined benefit pensions and 6% in insurance reserves. During the period covered by the survey, 152 respondents had an average return of minus 4.9% on their operating funds, 118 reported a negative return of 6.4% on their defined benefit pension and 79 organizations lost 1.1% on their insurance reserves. The S&P and Nasdaq declined 22% and 32% during this time.

Commonfund manages approximately US$29 billion for more than 1,600 schools, foundations, health care and other nonprofit institutions.

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