Endowments May Be Hedge Funds' Closest Friend

(January 29, 2013) — Endowments in the United States have an average hedge fund allocation of 19.1%, according to data firm Preqin.

Good news, hedge funds: There’s still room for growth.

While the average is 19.1%, endowments have a mean hedge fund target allocation of 19.4%, suggesting there is still scope for them to slightly increase their allocation to the asset class, Preqin said. The firm noted that US endowments are likely to be active in making new hedge fund investments over the coming 12 months. “A large proportion of endowments are operating at close to their target allocations but will continue to allocate as part of their natural portfolio turnover. California-based Pepperdine University’s endowment is currently planning new allocations as it looks to invest $6 million to $24 million in three to four hedge funds, focusing on macro and CTA strategies,” an analysis by Preqin found.

When opting between direct investments and hedge fund of funds, 34% of US endowments invest solely through hedge funds of funds, 33% invest directly, and 33% use a combination of the two methods, according to the research. While hedge fund of funds remain popular with smaller endowment plans to gain quick exposure, long/short equity remains the most popular hedge fund strategy overall, with 61% of endowments including this strategy as part of their portfolio.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Preqin tracks a total of 495 US-based endowments which account for 12.7% of all active investors on the firm’s Hedge Fund Investor Profiles database. These investors have a median assets under management of $250 million and on average include 10 investments in their hedge fund portfolios.

Related article: Alts Fees Drop Under Institutional Pressure

(January 29, 2013) — University endowments are increasingly questioning the role of fossil fuel-related companies in their portfolios, with some choosing to divest from them completely.

But one analysis by the Aperio Group, an investment-management firm that offers its clients a “socially responsible index,” has found that divesting from fossil-fuel companies does not necessarily add or detract value with regards to a university endowment. Rather, according to its research–titled “Do the Investment Math: Building a Carbon-Free Portfolio”–such divestment increases the risk to investors at such a modest level as to be negligible.

The research was headed by Aperio Group CIO Patrick Geddes, who studied the impact of 1) the so-called ‘Filthy 15,’ a group of coal utility and extraction companies designated by the university coal divestment campaign as the dirtiest public companies to hold, and 2) the exclusion of the entire industry of oil, gas, and consumable fuels.

As outlined by the study, the impact of removing all of the oil, gas, and consumable fuels industry results in forecasted tracking error versus the Russell 3000 of only 0.60%, which adds incremental portfolio risk of 0.01%. “The more narrow divestment of just the ‘Filthy 15’ results in a tracking error of only 0.14% with an incremental risk of 0.0006%.”

For more stories like this, sign up for the CIO Alert newsletter. 

According to Dan Apfel of the Responsible Endowments Coalition, “This report answers the critical question that students and university endowments have been asking: ‘Can we divest from fossil fuels without incurring additional risk?’ Now we have the math to show that carbon divestment is not just good for people and planet, but can have negligible impact on risk or profit.”

Andrew Behar CEO of As You Sow, a nonprofit organization that promotes corporate responsibility, stated: “The critical issue is aligning mission with investing. We are seeing the emergence of a powerful voice from a generation declaring that the extraction and combustion of fossil fuels threatens their future and therefore should not be financially supported. This report shows endowment trustees that they can fulfill their fiduciary duty by opting out of fossil fuel investments without incurring additional risk.”

The report comes as student groups at hundreds of colleges in the United States have been urging their universities’ endowments to divest from fossil-fuel companies in recent months. In November, for example, more than 70% of Harvard University’s roughly 3,600 undergraduate students voted to ditch fossil fuel investments from the school’s endowment. “Members of the Corporation Committee on Shareholder Responsibility will meet with students this semester to discuss endowment investment policies and the students’ concerns regarding fossil fuels,” Harvard University spokesperson Kevin Galvin said. He added that Harvard operates with a “strong presumption against divestment” from any industry.

Smaller institutions, such as Vermont-based Middlebury College, have also been vocal about the divestment.

Read Aperio Group’s full report here.