Endowments’ and foundations’ exposure to marketable alternatives in the second quarter stabilized and will hold steady for the next year, NEPC, an investment consulting firm to these investors, reported Tuesday.

Sixty-eight percent of endowments and foundations polled by NEPC in July reported that more than 10% of their portfolios were allocated to marketable alternatives, including hedge funds.

This compares with 45% of respondents that had at least 10% allocated to hedge funds in a similar survey last year.

Asked to look ahead to the next 12 months, 65% of respondents in the latest poll said they planned to maintain portfolio exposure, while 16% each said they would modestly increase or decrease exposure.

NEPC’s study found that both liquid and illiquid marketable alternatives had gained significant traction. Forty-eight percent of respondents said they used both, while 26% used only liquid and 13% illiquid.

Respondents’ investment preferences:

  • Direct hedge funds — 50%
  • Funds of hedge funds — 40%
  • Global asset allocation — 32%
  • Liquid alternatives — 18%

“Despite some criticism about high fees, most endowments and foundations consider marketable alternatives a vital component of their portfolios,” Kristin Reynolds, a partner in NEPC’s endowment and foundation practice, said in a statement.

Reynolds said the role of alternatives in these investors’ portfolios was unlikely to decrease any time in the foreseeable future.

 “Investors value the benefits that alternative strategies provide, especially because of lingering concerns about the impact that global economic and geopolitical uncertainties could have on portfolios,” she said.

Still, the survey found that investing in marketable alternatives had both advantages and disadvantages for investors. Eighty-one percent of respondents cited “portfolio diversification” as the top benefit, with 61% reporting “risk management.”

As for challenges, 76% cited “low or disappointing returns,” 73% said “high fees” and 65% pointed to “transparency.”

Cautiously Optimistic

Endowment and foundation investors’ current outlook on the U.S. economy is significantly more positive than it was a year ago, according to the survey. However, investors continue to monitor potential threats to investment performance.

Sixty-five percent of respondents said the U.S. economy was in a better place now, way up from 29% that said this in the year-earlier poll.

Looked at another way, 50% of respondents in the 2016 survey said the U.S. economy was in a worse place, compared with just 8% in the most recent one.

Thirty-nine percent of respondents considered a slowdown in global growth as the greatest threat to their investment performance over the near term, up five percentage points from the first quarter of 2017, but down 24 points from last year’s third quarter.

Thirty-seven percent cited geopolitics and political uncertainty as the greatest threat to their portfolios. This result was consistent with first-quarter respondents and down nine points from the fourth quarter of 2016.

— Check out Foundations’ Investment Returns Rebounded in Fiscal 2016 on ThinkAdvisor.