Data suggests that concerns including high fees and transparency have made foundations and endowments more skeptical about hedge funds.

Foundations and endowments are scaling back their exposure to hedge funds, propelled by concerns about high fees, underperformance and transparency, according to a recent NEPC survey.

Nearly a quarter (24 per cent) of respondents said they have no exposure to hedge funds, up significantly from 2 per cent in the Q2 2014 NEPC Endowment and Foundation Poll. Adding to this, 39 per cent in the Q2 2014 poll had 11-20 per cent of their portfolio allocated to hedge funds, compared to just 23 per cent in the latest survey.
 
“While hedge funds play an important role in many institutional portfolios, the last several years have been difficult for the industry and investors are starting to look very closely at how hedge funds can work for them,” said Cathy Konicki, partner and head of NEPC’s endowment an foundation practice group. “These survey results are by no means indicating a mass exodus from hedge funds, but they do point to greater pressure being felt by the industry as a whole.”

Respondents ranked low or disappointing returns as their biggest concern, followed by high fees and transparency. The findings do, however, shed some positive light on the hedge fund community, NEPC said. While 28 per cent said they have either reduced or are considering reducing their allocation to hedge funds, 55 per cent are not actively discussing this with their investment committee. Meanwhile, nearly a fifth (17 per cent) have either increased or are considering increasing their allocation.

As for which hedge fund strategies respondents are most bullish on, 36 per cent believe multi-strategy hedge funds will generate the highest returns over the next three to five years. Other top results to this question included long/short equity (33 per cent), global macro (25 per cent) and credit (22 per cent).

“This survey tells us that endowments and foundations are frustrated with hedge funds but they’re not giving up on them, and with several global concerns on the horizon, many investors may be looking towards hedge funds to protect their portfolios,” said Konicki.

Robert Casey and Thomas Livergood of the Family Wealth Alliance recently touched on hedge funds in an article on family wealth trends.

“The year 2008 recedes in time, but the frustration lingers on among family wealth investors,” they wrote. “[...] Many funds-of-funds are on the Endangered Species List. Hedge funds are still credible (some strategies at least) but face increased skepticism. Passive index funds, long a favorite of institutional investors, are finding their way into family portfolios because of low cost, predictability, transparency, liquidity, etc. They provide cheap beta and are usually supplemented by full-price alternative strategies expected to find alpha.”

It is unclear how many respondents took part in NEPC's survey.