Endowments Seek Single-Manager Hedge Funds
Since October 2009, BHA analysts have spoken with over 40 endowments. Of those, 26 have recently decided to begin investing in or make larger allocations to single-manager hedge funds.
The investment staffs of the endowments cited various reasons for the shift. Some emphasized interest in single-manager funds that were uncorrelated to equity market indices. Other endowments who had traditionally invested in funds of funds noted the cost-effectiveness of these funds when compared with fund of funds for their increased allocation to single-manager hedge funds.
Since the financial crises, an increasing number of endowments have been asking their investment committees to conduct more stringent due diligence and secure access to more information, such as reports on portfolio holdings and exposure. In response, the committees have augmented their staffs, hiring sophisticated analysts. Therefore, today, many committees have the staff necessary to research and evaluate single-manager funds.
A $500 million endowment based in the U.S. recently decided to invest in single-manager funds. The institution has typically gained hedge fund exposure through funds of funds; however, it believes that single-manager funds will provide more information about their strategies and more access to their portfolio managers than funds of funds. The endowment has decided to divest itself of its long-only portfolio and reallocate that money to single-manager hedge funds. It is seeking emerging managers, which it believes can access less saturated segments of the market and provide returns that a much larger fund may not be able to offer.
A multibillion dollar endowment in Canada has also decided to allocate to single-manager hedge funds, chiefly global macro or global technical asset allocation (GTAA) funds. To date, the institution has only invested in fund of funds. However, funds of funds’ double layering of fees and limited access to underlying managers makes increasing its single-manager exposure a more cost-effective and more transparent way of investing. Unlike the U.S. endowment, this fund is seeking highly experience managers and much larger funds for its foray into direct investing.
Endowments rely heavily on alternative investments, mainly hedge funds, to be able to support the operational and accrued costs of running their institutions. Now that the economic environment has improved and endowments are recovering, they are beginning to actively invest again and placing more emphasis on their ability to seek out, evaluate, and monitor investment opportunities internally. This shift in strategy has increased the investment activity in single-manager funds over the past two quarters and most likely will throughout the remainder of 2010.