Endowment, Foundation Investor Confidence Soars

42% of investors plan to increase their investment in private equity, while 30% said they will reduce their exposure to hedge funds.

By Michael Katz

A new report from investment consulting firm NEPC has found that endowment and foundation investors’ optimism for the coming year has risen sharply from a year ago.

According to the Q4 2016 NEPC Endowment and Foundation Poll, 64% of investors say the U.S. economy is in a better place now than at the same time last year, while only 7% said they think the economy is worse off. That’s a significant increase from the 28% of respondents who shared that sentiment in last year’s Q4 report.

“Despite everything that has happened over the last several months, endowments and foundations seem to be feeling pretty good right now,” said Cathy Konicki, head of NEPC’s Endowment & Foundation Practice Group. “There are certainly some headwinds on the horizon, but the results indicate a strong sense of economic optimism that we haven’t seen in quite some time.”

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Some of those headwinds stem from uncertainty regarding America’s trade policy under a new and unpredictable administration.

“When we think about some of the challenges coming out the changing domestic policy here in the U.S., the equity complex could be more impacted,” said Phillip Nelson, NEPC’s director of asset allocation. “China, Taiwan, and South Korea, are much larger components of the equity indices, so if there’s a change in trade policy you could see some unexpected hits to those markets.”

Despite this uncertainty, investors said they are bullish on U.S. equities, with 26% of respondents expecting them to be the top performing asset class in 2017.

Some of the investor optimism is also based on the fact that many are expecting interest rates to rise during the year.

“We asked them where interest rates would be by the end of the year and they said 50 to 100 basis points higher,” said Konicki. “So I think they are a little more aggressive than what’s priced into the markets.”

But not everything is seen through rose-colored lenses for investors. Despite the increased confidence, 47% think the S&P 500 will only return between 0% and 5% this year. And when asked what they thought was the biggest threat to their near-term investment performance, 46% of respondents said geopolitics and political uncertainty, while 38% cited a slowdown in global growth is their biggest concern.

The report also found that 42% of investors plan to increase their investment in private equity, while 30% said they will reduce their exposure to hedge funds. Only 2% said they expect hedge funds to be the strongest performing asset class in 2017. Additionally, 68% of respondents believe interest rates will rise by more than 51 basis points this year.

Equity Strategies Ranked Top Performer in 2016 Global Hedge Fund Report

Top performing funds were Tribeca Global Natural Resources Fund and Montreux Natural Resources Fund.


 

 By Chuck Epstein 

Consistent performance is a hallmark of good financial management and the 2017 Preqin Global Hedge Fund Report has identified the most consistent strategies and funds in seven categories over short- and longer-term time frames, and also by region.

Based on results from January 2012 to December 2016, Preqin tracked seven leading strategies: equity strategies, macro strategies, event-driven strategies, credit strategies, relative value strategies, multi-strategies and commodity trading advisors (CTAs).  

The leading strategy was equity strategies, where all of the top 10 most consistent top-performing funds were in the top decile across four metrics: annualized return, annualized volatility, Sharpe ratio and Sortino ratio. The top equity strategy fund followed a long-short approach. The top-performing strategy category from January 2012 to December 2016 was equity bias/long-short, followed by convertible arbitrage and equity value bias.  

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The 14-page 2017 Preqin report ranked funds according to performance, region, 10 separate investment strategy categories for 2016, and from the longer-term period of January 2012 to December 2016.

For 2016, the two top-performing funds were Tribeca Global Natural Resources Fund – Class A Tribeca Investment Partners Long/Short Equity Australia, which delivered a net return of 148.65%, followed by the Montreux Natural Resources Fund – Class A (USD) Montreux Capital Management Commodities, Switzerland, which returned 141.68%. (All returns are reported net of fees and expenses.)

For the longer period, the top two funds were the Passage to India Opportunity Fund (Cayman) – A Shares Arcstone Capital Long Bias, Value-Oriented, located in Mauritius that returned 44.84%, followed by the Japan Synthetic Warrant Fund – JPY Class Stratton Street Capital Convertible Arbitrage, based in the UK, which returned 36.41%.

By region, the top-performing North American fund was the Front Street Canadian Energy Resource Fund – Series F Front Street Capital Long/Short Equity Canada, which returned 132.50% in 2016. From Europe, the Montreux Natural Resources Fund – Class A (USD) Montreux Capital Management Commodities based in Switzerland returned 141.68% in 2016. From Asia-Pacific, the top fund was the Tribeca Global Natural Resources Fund – Class A Tribeca Investment Partners Long/Short Equity based in Australia, which returned 148.65%. Rounding out the geography-based funds was the FAMA Brazil Cayman Feeder Fund FAMA Investimentos Long Bias, Value-Oriented, headquartered in Brazil, which returned 87.04%. Four funds from Brazil ranked in this last category, plus one fund from South Africa.

How the Funds Were Chosen

The methodology used to rank these strategy categories used a percentile rank across four metrics: annualized return, annualized volatility, Sharpe ratio and Sortino ratio. The funds then were graded in a universe of hedge funds with matching strategy criteria and full performance data up to December 2016 on Preqin’s Hedge Fund Online database.

Each fund was then given an “average score” derived through an average of the four percentile values used to determine fund consistency. Preqin said that where a Sortino ratio could not be calculated due to the fund not generating a negative return in the sample period, the fund received a percentile score of 100 for its Sortino ratio metric.

 All Not Well in the Hedge Fund World

While the 2016 Preqin report researched the top global funds, another new report from educational endowments and foundations found conducted by the Commonfund and National Association of College and University Business Officers (NACUBO) found that 2016 returns for all alternative strategies were negative.

The poorest performer was commodities and managed futures, at -7.7%, up from -17.7% in 2015, followed by energy and natural resources, which returned -7.5% compared with -13.3% in 2015. Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives) returned -4.0% versus 2.7% in 2015, while distressed debt returned -0.6% compared with 5.4% in 2015.

Of the alternative investment strategies in FY 2016, private equity real estate (non-campus) provided the highest return, at 7.1%, down from 9.9% in 2015. Private equity (LBOs, mezzanine, M&A funds and international private equity) posted a 4.5% return, down from 9.3% in 2015. The top return strategy in 2015 was venture capital, posting a return of 15.1%, but this declined in 2016 with a return of 1.5%.

The NACUBO data was gathered from 805 US colleges and universities and were reported in the 2016 NACUBO-Commonfund Study of Endowments® (NCSE.)

 Also mentioned 2 paragraphs down using same language

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