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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
I
71
Equity
45.1%
Fixed
Income
20.5%
Other Alternatives
9.9%
Hedge
Funds
17.8%
Real
Estate
4.3%
Cash &
Other
2.4%
Chart 6a
Private
Equity
14.4%
Real Assets
20.5%
Cash
.3%
Chart 6b
Absolute Return
26.5%
Equity
28.2%
Fixed
Income
10%
Endowments with > $1 Billion in Assets
Yale University
Sources: NACUBO Commonfund Study of Endowments, 2002 & Yale University
These new products provided investors access to desired
market beta in a less expensive and more liquid way than
the general active long-only managers they had been using
previously. Fama’s and French’s research gave rise to the
notion that investors should not overpay for market beta. So
investors began to shift assets out of underachieving active
long-only managers and allocated these monies to passive
index funds or ETFs to get their desired beta returns.
The result was that those managers left in the actively
managed bucket were expected to show a clear ability to
generate alpha. As will now be discussed, much debate arose
as to whether this was indeed the best place in the portfolio
to seek such alpha.
Chart 42: US Endowment >$1bln Asset Allocation in 2002
“ We have been taking on our passive exposure mostly through
index funds, but we are exploring using institutional ETFs as
part of that mix,”
– Endowment
“ We have indices and ETFs. Tracking error is fairly limited
across the whole book,”
– European Public Pension