Endowments and foundations have been slow to funnel
their assets into alternative investments – hedge funds,
private equity, venture capital, and other asset classes
such as commodities and active currency – for fear the risk
was too great.
However, the survey findings by Pyramis Global Advisors, a Fidelity Investments subsidiary, show the driver behind a change in attitude by these institutions appears to be higher return expectations of 10% for private equity and equity, and returns of 7.4% for hedge funds, with an expectation of low volatility.
According to the findings, endowments and foundations, on average, have allocations of 20% to alternatives, which is high when compared to other sophisticated institutional investment pools like pension plans, which typically have less than 6%. However, larger endowments have even more exposure to alternative investments, at 35% – a percentage they plan to increase as they move out of traditional US equity holdings.
The survey identified three top obstacles to effective risk management for endowments and foundations:
- Lack of transparency;
- Self-admitted lack of internal expertise; and
- Data too dated to be useful.
The survey responses were from 77 of the largest foundations and endowments in the US.