NEPC, the investment consulting group that caters especially to endowments and foundations, has posted a survey about what such institutions think of marketable alternatives.
This broad category “marketable alternatives” includes direct hedge funds, funds of hedge funds, liquid alternatives, and global asset allocation. Eighty-seven percent of the Endowments & Foundations respondents in the survey were invested in one or more marketable alts so understood, and half of the respondents were invested in direct hedge funds.
Where are these allocations headed, near future? Not quite two-thirds of the respondents (65%) planned to maintain their current level of allocation in such investments. Sixteen percent plan to make a “modest change” increasing the allocation. Symmetrically, another 16% plan to make a “modest change” in the opposite direction. Only 3% plan to decrease the allocation “substantially,” and no respondents plan to increase it substantially.
As to what they have done over the past year: 18% have increased their allocation to such alternatives, 32% have decreased it, so the remaining half have kept it where it is.
Thirteen percent of respondents said that they have no exposure to marketable alternatives at all. Nearly half of the sample (47%) said that their exposure is between 11% and 20% of their portfolio. Twenty-one percent say that it is more than that, 19% that it is less. In graphic form, the range of responses looks like this:
There is a split on the question of the classification of marketable alternatives within a foundation or endowment’s portfolio, one that reflects a series of evenly divided binary choices. Not quite half (48%) of respondents say they have a dedicated allocation to this asset class, and that’s the end of the issue for them.
So that leaves 52% who do something else. A little more than half of them (about 28% of the whole) say that they have marketable alternatives both within a dedicated allocation and as part of an allocation to another class. For example, a marketable alternative investment in long/short equity might be considered suitable for classification within the “equity” part of the portfolio.
These two possibilities account for 76% of the respondents. The remaining 24% are almost evenly divided between those who have no exposure to such instruments at all (13%) and those who treat them exclusively as part of an allocation to other asset classes (11%).