Institutions Looming Over Hedge Funds

by Carla Johnson, Investors Offshore, London

15 March 2002

According to a new report from research house Greenwich Associates, US pension funds, endowments and foundations are increasing their exposure to private equity, hedge funds and, to a lesser extent, international equities as they reduce their reliance on equities. According to the report, the proportion of domestic equities in pension fund and endowment portfolios fell last year to just under 50% from 51.8% in 2000 and a peak of 53% in 1999.

Greenwich surveyed 1445 US investment professionals working at corporate pension funds, public pension funds, endowments and foundations between September and October. Most of the investment professionals Greenwich surveyed indicated they had no plans to adjust their allocation to US stocks. But the number of funds planning significant decreases in their exposure to actively managed domestic stocks in the next 12 months outnumbers those anticipating an increase by approximately three to two.

Greenwich reckons that the absolute sum of pension fund and endowment investment in hedge funds is only about $35 billion, but thinks these loosely regulated investment pools are better suited to boosting portfolio returns in the current volatile market environment. Of the 300 survey targets that currently invest in hedge funds or expect to do so, 130 expect to increase their allocation significantly in 2002, while a mere five to 10 expect to cut their exposure.

Endowments continue to lead the way in alternative investments, with 7.7% of their total assets going into private equity and 5.1% into hedge funds for a total of $60 billion. By contrast, corporate pension funds have a combined 4.4% of assets invested in private equity and hedge funds, while public pension funds invest have just 3.1% of assets in alternative investments.

There are two main reasons for this, according to Ryan Randolph, a community manager at Greenwich. The people in the endowment and foundation community are typically more familiar with alternative investments than their pension-fund counterparts. Many have personal experience investing in private equity and hedge funds. And endowments tend to be more willing to make riskier investments because they have an unlimited time horizon for returns, while most pension funds have a 30-year time horizon.

Recommended