Colleges Increase Hedge Fund, Private Equity Allocations

Colleges and universities continued to plow ever-larger portions of their endowments into alternatives last year. But, like hedge funds, their efforts left them lagging the broader markets.

According to a survey from the National Association of College and University Business Officers and TIAA-CREF, the average endowment allocated 9.6% to hedge funds and 1.9% to private equity, a 336% and 533% increase over the past decade, but their hedge fund investments in 2006 did only marginally better than their U.S. equity portfolios, returning 10.4% to the stocks’ 10.3%. In 2005, U.S. equity investments actually edged hedge funds, 8.8% to 8.5%.

Endowments did better in other alternative assets, especially natural resources (average allocation: 1.5%) at 28.2%, private equity at 17.9%, and real estate (average allocation: 3.5%), with the public portfolio returning 19% and the private portfolio returning 15.8%.

All told, the average higher education endowment returned 10.7%, substantially trailing the Standard & Poor’s 500 Index.