Nearly a quarter of endowments and
foundations now allocate nothing to hedge funds, compared with just 2% two
years ago, according to NEPC.
In addition, the proportion of survey
respondents allocating 10% or less of their portfolios to hedge funds has
swollen from 34% to 55% in the same period. Less than a quarter (23%) now allocate
11% to 20%, down from 39% in 2014.
The drastic shift in sentiment was revealed
by the consultant’s quarterly survey of the sector, conducted in July.
“While hedge funds play an important role
in many institutional portfolios, the last several years have been difficult
for the industry and investors are starting to look very closely at how hedge
funds can work for them,” said Cathy Konicki, head of NEPC’s endowment and foundation
The majority of investors—80%—were most
concerned about underperformance, NEPC found, while 54% cited high fees.
A quarter of respondents said they
have either asked for or been offered fee discounts in the past six months.
The data back up headline-grabbing moves
from several majorpensionfunds
in recent years to cut hedge fund allocations. However, Konicki emphasized that
endowments and foundations were not giving up on hedge funds altogether.
Instead, NEPC’s results “point to greater pressure being felt by the [hedge
fund] industry as a whole.”
“With several global concerns on the
horizon, many investors may be looking towards hedge funds to protect their
portfolios,” Konicki added.
Although more than a quarter (28%) of
respondents said they had reduced or were considering reducing allocations to
hedge funds, 55% were not discussing this option. A further 17% said they were
increasing or considering increasing their exposures.
GMO’s Ben Inker argued in a letter
to investors that the lengthy slump in performance from many hedge funds
could be a sign that the sector was due a reversal in fortune.
infographic illustrating its findings can
be accessed here.
Fund Flows Collapse in 2015; Asset
Owners Scale Up Hedge Fund Pools; GMO:
Now Is the Time for Hedge Funds