Foundations and Endowments Seek to Lower Investment Risks

May 23, 2014 ( – Foundations and endowments appear to be transitioning portfolios away from their largest holdings, according to eVestment, a provider of investment data analytics.

The firm’s recent “Investor Trends Report: Foundations and Endowments” finds that to mitigate the risks of a U.S. equity market decline, large allocations have gone to international markets via passive strategies. Additionally, recent large inflows into long/short and event-driven hedge funds likely include allocations from foundations and endowments. This would further reduce their directional risks and create more flexible regional exposures, say the report’s authors.

Foundations and endowments typically have a dual purposes for their funds, explain the report’s authors, which include: (1) to maintain and grow the portfolio after expenses and spending; and (2) to generate reasonably predictable cash flows for their varying operating budgets and goals. With this backdrop, the report notes that the current interest rate environment, along with a strong five-year run in U.S. equity markets, has caused concern for foundations and endowments.

In response to these variables, foundations and endowments have been actively addressing their concerns over the levels and future direction of interest rates by shifting to traditional global fixed income, and within the U.S. to floating rate bank loans, high-yield and long duration strategies (see “Retirement Investors Should Diversify Fixed Income”).

The report cites that with multiple surveys illustrating interest in hedge funds, private equity and real assets, along with what have been large aggregate flows into alternative credit strategies, foundations and endowments have been active in searching for new sources of yield and return from credit markets while also attempting to reduce exposure to directional movements in rate markets.

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