Colleges Eye More Private Equity, Alternatives as Returns Trail

  • Endowment business officers polled at industry conference
  • Hedge funds less popular as schools look to decrease stakes

College endowments are looking to get better returns from private equity and other alternative strategies as investment performance has underwhelmed, according to a new poll.

One third of school business officers surveyed at an industry conference ending Friday in New York said they anticipate increasing allocations to alternative strategies excluding hedge funds in fiscal 2017. The study showed that 9 percent of respondents expect to decrease their stakes to alternatives.

There was less enthusiasm for hedge funds, with 9 percent planning to increase exposure while 17 percent said they would lower their stakes, according to a poll of about 60 schools at the three-day event organized by the National Association of College and University Business Officers and money manager Commonfund.

Seeking Growth

Alternatives were the top-performing asset classes for endowments, with venture capital delivering an average return of 15.1 percent in the year ended June 30, followed by private real estate at 9.9 percent and buyout and other types of private equity at 9.3 percent, according to a study released last week by the two groups. Hedge funds lagged at 2.7 percent, the report found.

“Endowment fiduciaries are looking to alternative investment strategies in search of diversification and growth,” said William Jarvis, executive director of the Commonfund Institute, a research arm of the money manager.

Public U.S. equity markets are perceived as fully valued, the European and Japanese economies are struggling, growth in emerging markets and China has slowed markedly and bond markets offer low returns, he said.

Endowment Spending

The average college endowment posted a gain of 2.4 percent last year, bringing 10-year performance down to 6.3 percent, well below expectations, according to the study. Universities with more than $1 billion under management, which had much greater exposure to alternatives, had the best performance at 4.3 percent.

The drop in returns, combined with market losses from the first six months of this fiscal year, are raising concerns about the pace of endowment spending on academics. The NACUBO report showed schools closely managing their payouts, with the average spending rate falling to 4.2 percent in 2015 from 4.4 percent in the year prior.

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