Viewpoint: The Move in Marketable Alternative Strategies

March 28, 2022 |
2 minute read
|

In the 2021 Commonfund Benchmarks Study® of Independent schools we continue to see the allocation to marketable alternative strategies decline, raising questions about why and whether it will continue.

Independent schools’ allocation embraces hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives. Tracking this allocation over the past four years1 shows the trend:

Fiscal Year Allocations (%)
FY2018 18
FY2019 17
FY2020 17
FY2021 12

As the allocation is reported on a dollar-weighted basis, major moves by schools with assets over $50 million have the greatest impact. Among this size cohort, the allocation has shrunk from 22 percent in FY2018 to 14 percent in FY2021. But schools in other size categories have also reduced their allocation; this fiscal year alone, schools with assets between $10 and $50 million lowered their allocation to 3 percent from 7 percent.

Whether this trend continues is a question that can only be answered by future Studies. Discerning why is more problematic. Traditional U.S. equity returns have been exceptionally strong over the past three years; that could well attract additional assets and, if not rebalanced, would swell U.S. equities’ share of schools’ portfolios.

There is a benefit associated with a lower allocation to marketable alternative strategies: better diversifying the allocation to alternative strategies in general. We have commented on aspects of this before, noting that independent schools’ alternatives allocation was highly concentrated, mostly in marketable alternatives.

Taking schools in the middle range of the three size cohorts as an example, in the following table we have FY2018 versus current allocations for schools with assets between $10 and $50 million.

numbers in percent (%) FY2018 FY2021
Private equity 2 4
Private credit - -
Marketable alternatives 8 3
Venture capital - 1
Private equity real estate (non campus) 1 1
Energy and natural resources 2 -
Commodities and managed futures 1 1
Distressed debt - -

Takeaways

  • Overall, this cohort’s allocation to alternatives strategies has decreased by four percentage points, 14 percent to 10 percent. That happens to be the same four-percentage-point reduction in the alternative strategy allocation for all schools in the Study, 33 percent in FY2018 to 29 percent in FY2021.
  • Diversification for schools with assets between $10 and $50 million has improved: A higher—and more meaningful—allocation to private equity; a much smaller allocation to marketable alternatives, thus leading to a better-balanced allocation; and at least a small allocation to venture capital—one percent versus none in FY2018.
  • On the other hand, there was no allocation to energy and natural resources, where previously there was a two percent allocation. The allocations to private equity real estate (non-campus) and commodities and managed futures were unchanged at one percent. Private credit was not included in the FY2018 Study and distressed debt remained at zero.

Conclusion

Independent schools’ portfolios are tipped toward U.S. equities; this fiscal year’s 34 percent allocation was a significant move compared with 28 percent in FY2018. While the allocation to alternative strategies in general has decreased, it remains at a meaningful 29 percent, making it the second-largest allocation overall.

That, however, continues to be accounted for by schools with assets over $50 million, whose dollar-weighted alternatives allocation was 35 percent in the current Study. On an equal-weighted basis, these schools’ allocation fell to 27 percent. And for all schools in the Study the dollar-weighted 29 percent overall alternatives allocation decreased to just 14 percent equal-weighted.

Schools with assets over $50 million continue to have a proportional allocation to alternative strategies. Schools in the other two size cohorts may want to consider more meaningful allocations (being mindful that schools with assets under $5 million may not qualify as accredited investors). Regardless of the size of their alternatives allocation overall, schools in all three size categories may want to work toward greater diversification within the allocation.

For further information, please request a copy of the 2021 Commonfund Benchmarks Study® of Independent Schools.

CSIS Benchmark Study Request

  1. Data from Studies prior to FY2018 cannot be used because the methodology changed and is thus not comparable.
Commonfund Institute

Author

Commonfund Institute

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.