Endowments slow to recover from 2008 crisis as hedge funds lag
U.S. college endowments are still struggling to recover from losses triggered by the collapse of Lehman Brothers Holdings Inc., as investments in hedge funds have lagged behind traditional strategies such as stocks.
About 47 percent of school funds have not recouped losses from 2008, Commonfund and the National Association of College and University Business Officers said at a press briefing yesterday. Hedge funds returned 9.4 percent in the year ended June 30, the worst-performing portion among endowments’ alternatives strategies, as U.S. stocks surged 30 percent in that period, according to a report released today.
This despite that some endowments had strong gains in the past year.
Harvard University, the world’s richest school, with a $32 billion endowment, rose 21 percent in the year ended June 30. The $19.4 billion fund at Yale in New Haven, Connecticut, rose 22 percent.
Columbia University’s $7.8 billion fund in New York was the best performer among the eight Ivy League schools last year, with a 24 percent gain.
Endowments, especially larger ones, have boosted their reliance on hedge funds as they seek returns higher than the inflation-adjusted spending rates of universities. Endowments with more than $1 billion had 60 percent of their assets devoted to alternative strategies such as hedge funds, compared with 10 percent for those with less than $25 million. That strategy has backfired as elevated stock-market volatility has sapped hedge fund returns since 2008.
“Hedge funds have been struggling — active management has been difficult,’’ Verne Sedlacek, Commonfund’s chief executive officer, said at the briefing in New York. “Hedge funds didn’t do as well as the stock market and relative to other alternative investments for the one-year period.’’
Commonfund, based in Wilton, Connecticut, manages more than $24 billion for not-for-profit clients and surveyed 823 U.S. schools.
Hedge funds fell 4.9 percent in 2011 as the European debt crisis prompted a worldwide aversion to risk and market volatility rose, according to the Bloomberg aggregate hedge-fund index. The U.S. benchmark Standard & Poor’s 500 Index was mostly unchanged in 2011.
Smaller endowments, with less of their assets in alternative investments, did better than their larger counterparts over the past three years, according to the report. Over five- and 10-year periods, larger endowments did better, the report said.
The average endowment’s allocation to alternative strategies such as hedge funds, private equity, real estate and commodities climbed to 53 percent from 52 percent the previous year. Commodities and managed futures returned the most among alternative investments, advancing 26 percent, while private equity rose 19 percent.
Endowments gained an average of 19 percent in the year ended June 30, according to the report. Funds probably fell about 3.5 percent on average from July through December, according to Sedlacek, while the S&P 500 slumped 4.8 percent.
“Even though we had a really great year, many of our institutions are still not at a point where they’ve recovered from the recession,’’ John Griswold, executive director at Commonfund, said at the briefing. “Almost half of U.S. endowments are still trying to make up ground for the losses that they experienced in 2008 and 2009.’’
Universities sold bonds, laid off employees and delayed construction after the 2008 financial crash. School funds lost an average of 19 percent in the year ended June 2009, the biggest loss in the 37 years that Commonfund and Nacubo have kept records. Average 10-year annualized returns lag behind the average inflation-adjusted spending rates at schools.
Yale University’s David Swensen pioneered the idea of using hedge funds and hard-to-sell assets to try to beat stocks and bonds. The stakes ballooned as a percentage of large endowments when markets tumbled, saddling schools with funding shortfalls.
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