Hedge Funds Drive Strong Returns at U.S. Endowments: Commonfund Benchmarks Study

The top decile U.S. endowments were almost 50% invested in “alternatives” - hedge funds, private equity, real estate, distressed debt, energy and natural resources and venture capital -, and reported returns in excess of 16.8% in 2006, according to the 2007 Commonfund Benchmarks Study of Educational Endowments.  

Overall, U.S. educational endowments and foundations reported increased average annual total returns of 10.6% in Fiscal Year 2006, up from average annual total returns of 9.7% reported for FY2005, 14.7% for FY2004, 3.1% for FY2003, -6.0% for FY2002, and -3.0% for FY2001. 



Benchmarks Leaders – endowments placing in the top decile and top quartile of Study participants in terms of FY2006 investment returns – reported returns in excess of 16.8%and 14.8 percent, respectively, up from 16.1 percent and 13.9 percent the previous year. 


Other Highlights:

  • Overall allocations in FY2006 for all respondents were: domestic equity (26 percent vs. 28 percent the previous year), fixed income (13 percent vs. 16 percent), international equity (20 percent vs. 18 percent), alternative strategies (39 percent vs. 35 percent) and cash/short term (2 percent vs. 3 percent).
  • Top decile respondents’ domestic equity allocations fell to 18 percent vs. 20 percent, and top quartile performers reduced domestic equity to 21 percent vs. 22 percent. 
  • Active strategies accounted for 79 percent of domestic equities for all participants, and indexed equities (passive/enhanced) were 21 percent for all participants vs. 20 percent in FY2005, 22 percent vs. 29 percent for top decile, and 21 percent vs. 23 percent for top quartile respondents. Domestic equity returns averaged 10.2 percent in 2006. 
  • International equity was the top performing traditional asset class in FY2006 with an average return of 24.7 percent, and its asset allocation increased to 20 percent vs. 18 percent the previous year. 
  • Institutions with more than $1 billion derived more than 75% of their returns from their investments. 

Hedge Funds, the force to live with:

There are more than 9,000 funds that vary greatly in the kinds of investments they make, returns they seek and strategies they employ. According to Hedge Fund Research, since the beginning of 2005 almost 1,300 hedge funds have closed. During that time, more than 3,000 have been started.

The top 10 percent of performers among the endowments allocated 49% of their money to alternatives, compared with 11 percent for fixed income, 18 percent for domestic equity and 21 percent for international equity. 

The top quartile of performers also show a heavy weighting to alternatives: 46 percent, compared with 11 percent for fixed income, 20 percent for international equity and 21 percent for domestic equity.

Hedge Fund Research, a Chicago-based research firm, estimates thata total of $110 billion flowed into new funds through November. A study released by Deutsche Bank surveyed investors who represent $900 billion of the total $1.4 trillion in the industry and predicted that $110 billion will flow into the sector in 2007.

According to a separate study conducted by Casey, Quirk & Associates last fall:

  • 72% of respondents said that hedge fund returns came within 1 percentage point of their target. 
  • 25% of investors said they did better than expected: 19 percent exceeded their target by 1 to 5 percentage point. Only 3 percent said their investment underperformed.
  • 80% of those surveyed by Casey, Quick said they expected returns below 10%, with the bulk anticipating 8 to 9 percent. Only 20 percent expected more than 10 percent.


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