Education endowments taste for hedge funds shifts

Date: Friday, January 18, 2008
Author: Reuters.com

Universities and schools that long relied on alternative investments such as hedge funds to grow their endowments are adding money more slowly to these loosely regulated portfolios, researchers said on Thursday.

For years endowments plowed ever bigger amounts of money into alternative investments, making them largely responsible for helping hedge fund assets double to $2 trillion in roughly three years.

Harvard University, which boasts the country\'s biggest educational endowment of $35 billion, relied on hedge funds to help earn an average annual return of 18.4 percent over five years. That compares with a 13.8 percent return for the Trust Universe Comparison Service, a widely used endowment benchmark.

But last year, the Commonfund Institute, a group that polls 767 educational endowments on their investment tastes every year, found that appetite fell off some.

"Endowments seem to have decided that the pace should not continue at the rate it has been," said William Jarvis, a managing director at the organization.

By 2007 endowments had invested roughly 42 percent of their money in alternatives, up from 27 percent in 2000. Large endowments, with over $1 billion in assets, have as much as 47 percent invested.

The latest data show annual increases were more moderate and that schools, while hardly turning their back on hedge funds, were clearly adopting a go slow approach to investing.

For example, endowments with over $1 billion in assets allocated 47 percent of total assets to alternatives last year, showing only a small increase from 46 percent in 2006. In 2005, they stood at 42 percent.

Endowments with $51 million to $100 million kept their allocation to alternatives unchanged at 18 percent in 2007 and less wealthy schools whose endowments total less than $10 million cut their allocation to 7 percent in 2007 from 8 percent in 2006.

"Different investment committees look at the role of alternatives in different ways, but it is never prudent to load up too much on any asset class," Jarvis said, explaining last year's moves.

In fiscal 2007, endowments earned an average 16.9 percent, marking a healthy increase from 10.6 percent in 2006. Harvard University's 23 percent return in 2007 swelled the endowment to $35 billion and Yale University's endowment grew to $22.5 billion on a 28 percent return in 2007.

For most endowments, strong stock markets helped boost returns in 2007, Jarvis said, noting that hedge fund did their part to boost returns. He said it will be interesting to see how endowments may shift allocations next year when the fallout of recent turbulent market conditions will be better known.

Wealthy universities have been pressured by U.S. lawmakers to spend more of their money every year to make tuition, room and board, which tops $40,000 every year, more affordable for students. (Reporting by Svea Herbst-Bayliss; Editing by Andre Grenon)