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Hedge Fund Research: Endowments and Foundations In 2014

researchNew York (HedgeCo.Net) – The inaugural NEPC poll found that 40% of respondents were planning to raise their allocations to hedge funds and real assets in 2014.

NEPC, which is a consulting firm to endowments and foundations, said: “Generally speaking, we found that senior investment professionals at endowments and foundations are feeling reasonably sanguine about the state of the US economy, with 86% noting it’s in a ‘better or the same place as this time last year,’ and they’re similarly satisfied with their organization’s 2014 financial prognosis”

“Interestingly, against this backdrop of economic approval and robust market performance, results show endowments and foundations are paring back on their allocations to US equities and fixed income in favor of a range of alternative assets.” Cathy Konicki, Partner and Head of NEPC’s Endowment & Foundation Practice Group, said.

When asked which asset class exposures they plan to change in 2014, respondents overwhelmingly indicated a desire to increase their alternative investments exposure. Specifically, roughly 40% said they plan to raise their allocations to hedge funds and real assets, 32% plan to increase their share of private equity, and 33% will escalate their private debt investments.

Conversely, 46% of respondents plan to decrease their domestic fixed income exposure, while 28% will cut their domestic equities and 13% plan to reduce emerging market debt exposure.

When asked about confidence in their organizations’ ability to comfortably meet investment return objectives for FY 2014, 61% of respondents said they’re “highly” or “moderately” confident. Looking three years out, however, the picture changes dramatically, with 73% of respondents indicating they were “not confident at all” or “somewhat confident” about meeting return objectives.

Asked which single event poses the greatest threat to investment performance over the near term, 60% of endowments and foundations noted “slowdown in global growth.” In second place (33%) was “US budget deficit/government shutdown,” and in a distant third position (4%), “rising interest rates.”

As it relates to mitigating interest rate risk in their portfolios, 44% of endowments and foundations have “reduced fixed income allocations,” 35% added “less constrained mandates,” and 7% added an “overlay strategy.”

Not surprisingly, 73% of respondents said “lower than expected market returns” posed the greatest risk to their investment programs over the long-term, followed by “loss of value,” (16%), and “inflation,” (11%).

This year has been reasonably good from a fund raising standpoint, with 37% saying that giving increased over 2012, and 42% noting that giving is on par with the previous year.

Investment management fees for respondents appear to be fairly consistent with industry norms, with 33% of endowments and foundations noting that fees range from “.75% – 1.00%,” 29% indicating a range of “.50% to .75%,” and 20% indicating a range of “1.00% to 1.25%.”


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