Home ListingJanuary 22, 2016

‘Scrutinize Hedge Funds Now,’ Endowments Told

Investors must ensure they are holding the right funds for their needs, says Mercer.

Reported by Featured Author

Nonprofit investors should scrutinize their hedge fund programs after the sector failed to keep up with equity market rallies in recent years, according to Mercer.

The consulting firm published a checklist for endowments and foundations (E&Fs) detailing several areas in need of attention, including liquidity, benchmarking, and hedge fund allocations.

“Endowments and foundations are among the largest users of hedge funds, embracing a wide variety of strategies in pursuit of stronger returns and managing portfolio risk,” Mercer said. “Given the strong equity markets in the past seven years, many hedge fund strategies haven’t generated the results that many E&Fs were expecting. E&Fs should take the opportunity to revisit their hedge fund portfolios and confirm the role and expectations for hedge funds.”

According to Preqin, the sector posted its worst calendar year return since 2011 last year: The data provider’s all-strategies hedge fund index gained 2% in 2015.

“The hedge fund industry has been exposed to much of the financial turmoil of 2015, from the continuing fall in commodities prices to the loss of confidence in the Chinese stock market,” said Amy Bensted, head of hedge fund products at Preqin. “These difficulties have created very difficult conditions for many firms, and left some investors questioning the ability of the industry to properly hedge losses in other markets.”

However, in an outlook report for the hedge fund industry published earlier this month, eVestment forecast institutional investors would drive inflows of $50 billion to $60 billion in 2016.

Peter Laurelli, head of research at eVestment, wrote that hedge funds as a whole should see growth this year, “barring the occurrence of an outlier event.”

“Inflows should be supported by the continuing slow and steady reallocation of assets from traditional to alternative strategies,” Laurelli said. “In spite of some high-profile negative hedge fund news during 2015 and underwhelming performance in some segments, other hedge fund segments and individual hedge funds performed well, making hedge funds of interest to institutional investors looking for investment diversity.”