Foundations and Endowments Investing in Alternatives
Despite the fact educational endowment returns declined sharply in the 2015 Fiscal Year to 2.4% from 15.5% in the prior year according to the 2015 NACUBO-Commonfund Study of Endowments® (NCSE), these institutional investors, along with other non-profit investors such as foundations, are urged to have a substantial allocation to alternative investments given recent underperformance of other types of investments.
At this month’s EisnerAmper monthly breakfast series for fund managers and investors, a trio of industry veterans shared their outlook on foundation and endowment investing in alternatives, strategies expected to do well, and things managers should know when targeting these investor groups.
- Credit is expected to be a hot area due to the dislocation in the credit market, especially amongst structured credit. Endowments and foundations can do well with that exposure.
- Additionally, private equity is expected to be another popular area amongst these non-profit investors.
- Managers must have a proven, repeatable investment process, evident in all market conditions, when targeting endowments and foundations.
- A number of foundations and endowments have emerging manager programs, but solid pedigree of the funds is key.
Institutional vs. HNW Investors
- Endowments and foundations, classified as institutional investors, are different from high net worth (HNW) investors when it comes to allocating to alternatives; and fund managers must be cognizant of the distinction.
- Many HNW investors initially want to follow the investment pattern of endowments and foundations until they become hesitant that their capital will be locked up for a few years, especially if they have exposure to private equity investments. Therefore, the retail channel has expressed more interest in secondary marketers, which don’t have a long lockup period.
EisnerAmper would like to thank the panelists for their time and insights:
- Cedric Fan, Head of Hedge Fund Research, Russell Investments
- Michael Fortsl, Managing Director, Morgan Creek Funds
- William Jarvis, Managing Director, Commonfund Institute