Impact of Hedge Fund Allocation on Endowment Returns - Managed Funds Association (2024)

FAQs

Impact of Hedge Fund Allocation on Endowment Returns - Managed Funds Association? ›

Increased Investment in Hedge Funds Are Associated with Higher Returns. MFA analysis of Pensions and Investments (P&I) university endowments data found that increasing investments in hedge funds help institutional investors achieve higher returns.

Asset allocation models are usually determined by an endowment's investment committee. Endowments allocate the largest percentages of their portfolios to alternative asset classes like hedge funds, private equity, venture capital, and real assets like oil and other natural resources.

The study found 10-year returns for endowments averaged 7.2%. Although smaller endowments posted larger returns in fiscal 2023, bigger endowments have historically had higher returns. In fact, institutions with over $5 billion in assets have 10-year average returns of 9.1%.

Hedge funds tend to provide returns uncorrelated with market returns and institutional investors—endowments in particular—use hedge funds to protect their assets from market downturns and to reduce the volatility of their returns.

Many Ivy League and other top universities have tapped donors and alumni to bolster their wealth, which can rival the GDP of many nations. Universities, including Harvard, have typically built their endowments through two pathways: donations and investment gains.

Set aside 12 months of your expenses in liquid fund to take care of emergencies. Invest 20% of your investable surplus into gold, that generally has an inverse correlation with equity. Allocate the balance 80% of your investable surplus in a diversified equity portfolio.

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

The five years from the first day of any month that the 20% rule takes effect (The 20% rule). You cannot make more than one withdrawal during a restriction period. This applies whether you withdraw a portion or the most you are allowed. There are no exceptions to this rule.

Endowment policy illustrations are typically with 4 and 8 per cent per annum returns and not 10 per cent. The net returns on endowment plans are rarely more than 5-6 per cent, including the bonus, which accrues over time.

Calculating Endowment Returns Using An Endowment Calculator

It uses the concepts of compound interest and inflation. You just need to input your initial investment amount, the interest rate you are expecting, how much you plan to invest over time, and how often you will make these additional investments.

Why do endowments invest in hedge funds? ›

Hedge funds tend to provide returns uncorrelated with market returns and institutional investors—endowments in particular—use hedge funds as a way to protect their assets from market downturns and reduce the volatility of their returns.

In CAPTRUST's 2023 survey, endowments and foundations that are turning to alternatives reported two common objectives: diversification (86 percent) and increased portfolio returns (64 percent), as shown in Figure Two. Diversification occurs primarily via exposure to different asset classes.

Harvard University: $50.7 Billion

Harvard's endowment, the largest of the Ivy League schools, returned 2.9%, or $1.3 billion, in FY 2023, though distributions to university operations led to a fall in the fund's total value from $50.9 billion to $50.7 billion.

Harvard Management Co., which manages the endowment, allocates 39% of its endowment portfolio to private equity and another 31% to hedge funds. Public equity accounted for 11% of the asset allocation. Real estate had an allocation of 5%, bonds made up 6% of the portfolio and cash was 5%.

Endowment funds support the teaching, research, and public service missions of colleges and universities. Typically, endowment funds follow a fairly strict set of long-term guidelines that dictate the asset allocation that will yield the targeted return without taking on too much risk.

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.

Harvard Management Co., which manages the endowment, allocates 39% of its endowment portfolio to private equity and another 31% to hedge funds. Public equity accounted for 11% of the asset allocation. Real estate had an allocation of 5%, bonds made up 6% of the portfolio and cash was 5%.

Some endowment funds have guidelines stating how much of each year's investment income can be spent. For many universities, this amount is approximately 5% of the endowment's total asset value.