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Endowment Hedge Fund Returns Eclipsed

Date: Wednesday, January 24, 2007
Author: Chidem Kurdas, New York Bureau Chief, Hedgeworld.com

NEW YORK (HedgeWorld.com)—School endowments' hedge fund investments had higher returns in fiscal 2006 than in 2005 but still earned slightly less than the average for all asset classes in endowment portfolios, according to a new survey by the National Association of College and University Business Officers and TIAA-CREF.

The 10.4% that endowments made from hedge funds in fiscal 2006 was up from 8.5% in fiscal 2005. But it was far surpassed by natural resource investments, which returned in excess of 28%, and non-U.S. equity, which made 25%. Private equity returns, at 18%, also were well above the average across asset classes.

In general terms these data are not far removed from the previous year's pattern, albeit with some significant changes like a rise in non-U.S. equity returns.

However, the comparison does not give a full picture of performance variations because it does not take account of differences in risk. For instance, natural resource returns are more volatile and private equity is illiquid compared with hedge funds.

The survey of 765 institutions showed that sharp differences persist among large and small endowments. Endowments with more than $1 billion in assets made more than 15% for the period, while on the other end of the spectrum endowments with less than $25 million made a little over half of that return.

Large endowments retained their edge in alternatives investing, whether hedge funds, private equity, venture capital or natural resources, another pattern documented in past years. Those with more than $1 billion had 22.4% of their assets in hedge funds, versus less than 3% for the smallest endowments.

Overall, there is a persistent long-term trend of growing interest in alternatives. In the past 10 years, school endowments more than tripled their allocations to all alternatives, from 5.4% to 17.3%, according to NACUBO surveys Previous HedgeWorld Story.

Hedge funds remain the largest single category among endowment alternative investments, accounting for 9.6% of total assets (as an equal-weighted average). Private equity accounts for less than 2% of assets and natural resources for 1.5%.