Endowments Increasing Direct Hedge Fund Investments

Jan 26 2006 | 7:41pm ET

By Deirdre Brennan 

Alan Lenahan, senior alternative investment analyst at Fund Evaluation Group, which provides consulting and advice to institutional and high-net-worth investors, is seeing an up-tick in endowments investing directly with hedge funds.

“There is a trend away from fund-of-funds toward direct hedge funds,” said Lenahan. “Investors who have become comfortable with funds-of-funds over some years of investing think that they have gotten their education and are much more comfortable with the space,” he said, adding that he believes this trend will grow significantly over the next few years.

According to Chicago-based Hedge Fund Research, last year hedge funds saw net inflows of $47 billion, down 36% compared with 2004. Funds-of-funds, which manage roughly one-third of all hedge fund assets, were hit the hardest, with net inflows of only $9.5 billion, down a whopping 71% from 2004.

While endowments make up only 7% of all hedge fund assets, how and where they chose to make investments could have a significant impact on the industry.

Colin Ambrose, who took up the post of chief investment officer for The Juilliard School's $570 million endowment last summer, has also noticed institutions increasing their direct investments with hedge funds.

He said this is also true of private equity vehicles. “It’s a learning curve, some institutions will start with fund-of- funds allocations and as they move up the learning curve they will go directly to managers,” said Ambrose, who prior to joining Julliard served as a senior investment officer at Wesleyan University.

“[Juilliard has] a diversified portfolio with direct allocations to alternatives,” he said, adding that the famed music school invests in both hedge funds and private equity vehicles, but does not currently have any money allocated to funds-of-funds.

Ambrose declined to go into specifics about Juilliard’s investments, though he said that over time he would work to continue to build up the endowment’s private equity program.

Other Trends: Portable Alpha, India and Asia

In addition to entering the hedge fund space, universities are constantly looking for ways to grow their endowments while at the same time mitigating risk. “I think endowments are tending to be more flexible and opportunistic in their portfolio allocations,” Ambrose said. “The separation of alpha and beta is one of those trends that is becoming really hot right now.”

Lenahan has also noticed the growing interest among institutional investors in portable alpha, though he points out that there are still very few products that bundle together portable alpha and beta.

“There is still a lack of turnkey solutions out there, so often times you see some of the larger institutions willing to enter into the slot of future contracts to create the beta themselves,” said Lenahan. “They are the first to act, and some others are waiting for turnkey solutions which will meet their needs.”

Ambrose said that India and the Far East are also popular places for institutions to invest right now. “I’ve seen a lot of people looking at China and India, actually on the direct play in private equity opportunities. I’m not so sure that that is the best way to play that area,” said Ambrose. “It’s a challenging environment. It’s an exciting time with increased globalization, geopolitical risks and overall volatility in the markets.”  

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