Endowments May Be Hedge Funds' Closest Friend

Preqin predicts endowments will increase their allocations to hedge funds over the next 12 months.

(January 29, 2013) — Endowments in the United States have an average hedge fund allocation of 19.1%, according to data firm Preqin.

Good news, hedge funds: There’s still room for growth.

While the average is 19.1%, endowments have a mean hedge fund target allocation of 19.4%, suggesting there is still scope for them to slightly increase their allocation to the asset class, Preqin said. The firm noted that US endowments are likely to be active in making new hedge fund investments over the coming 12 months. “A large proportion of endowments are operating at close to their target allocations but will continue to allocate as part of their natural portfolio turnover. California-based Pepperdine University’s endowment is currently planning new allocations as it looks to invest $6 million to $24 million in three to four hedge funds, focusing on macro and CTA strategies,” an analysis by Preqin found.

When opting between direct investments and hedge fund of funds, 34% of US endowments invest solely through hedge funds of funds, 33% invest directly, and 33% use a combination of the two methods, according to the research. While hedge fund of funds remain popular with smaller endowment plans to gain quick exposure, long/short equity remains the most popular hedge fund strategy overall, with 61% of endowments including this strategy as part of their portfolio.

Preqin tracks a total of 495 US-based endowments which account for 12.7% of all active investors on the firm’s Hedge Fund Investor Profiles database. These investors have a median assets under management of $250 million and on average include 10 investments in their hedge fund portfolios.

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