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.

Strategy Spotlight:  

• 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.   

Manager Perspective:  

• 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