Are E&F Investors Abandoning Hedge Funds?

Endowments and foundations are the latest investor group to put pressure on the traditional hedge fund model.

Nearly a quarter of endowments and foundations now allocate nothing to hedge funds, compared with just 2% two years ago, according to an NEPC poll.

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 between 11% and 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 practice group.

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.

NEPC survey Q2 2016Source: NEPCThe data back up headline-grabbing moves from several major pension funds 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 toward hedge funds to protect their portfolios,” Konicki added.

Last week, 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. 

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.

Related: Hedge Fund Flows Collapse in 2015; Asset Owners Scale Up Hedge Fund Pools; GMO: Now Is the Time for Hedge Funds