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* Big endowments had 61 percent in alternative investments
* Illiquid funds trapped some U.S. endowments in 2009
* "Rebalancing" to take several years
By Aaron Pressman
NEW YORK, Jan 28 (Reuters) - U.S. college and university endowment funds with at least $1 billion had 61 percent of their assets in alternative investments like hedge funds last year, the most ever.
The allocation to alternatives, which jumped from 52 percent in 2008, grew even as the category posted an 18 percent loss for the year, according to a survey conducted by the National Association of College and University Business Officers and the Commonfund Institute, which provides research and training to endowments.
But over the next few years, big endowments are expected to reduce their allocation to alternatives, investment analysts said. That would mark a reversal of the trend of the past 20 years of endowments shifting money away from typical stocks and bonds to more arcane, sophisticated and illiquid products.
The reversal comes after some of the hedge funds, private equity offerings and other unusual investments did not perform as expected during the credit crisis. And the total allocation may have been artificially boosted for one year as endowments in need of quick cash sold more liquid stocks and bonds.
The 61 percent level "sounds a little high to be sustainable," said Michael Crook, investment strategist at Barclays Wealth in New York who advises endowment managers. "Around 50 percent for the long run seems more sustainable for most endowments."
Precisely how much should be committed to alternatives is the "million dollar question," according to money manager Mebane Faber, who wrote a book about endowment investing called "The Ivy Portfolio". "But, in general, [60 percent] is a lot of equity-like and illiquid exposure."
Big endowments discovered during the credit crisis that it can be costly to quickly shed positions in alternative areas like private equity and venture capital, NACUBO and Commonfund officials said.
Harvard University, which suffered a 27 percent loss in its endowment, tried selling some of its private equity stakes last year but bidders offered such low prices the sales effort was abandoned.
"Many of these assets are difficult to rebalance because they are so illiquid and the money is locked up long-term," Verne Sedlacek, president and chief executive of the Commonfund, said at a news conference in New York.
Significantly reducing the average 61 percent alternative stake is a process likely to take "several years," Sedlacek said.
The survey included responses from 842 U.S. institutions, including 52 with at least $1 billion, and covered the most recent fiscal year, which ended June 30, 2009.
Within their overall 2009 allocations to alternatives, the largest endowment funds had 22 percent invested with private equity funds, 13 percent with private real estate funds, 40 percent with hedge funds, 12 percent in energy and natural resources, 8 percent in venture capital and 5 percent in distressed debt funds.
The poor performance of alternative investments doomed large endowments to a 20.5 percent loss for the year and marked the first time in a decade that smaller institutions outperformed.
As NACUBO reported in December, all endowments on average lost 18.7 percent for the year.
The smallest funds, those with under $25 million, posted a loss of 16.8 percent. They ended the year with just 13 percent of their assets invested in alternatives, up from 9 percent at the end of 2008.
The relative performance of large and small endowments during the recent crisis was the opposite of what happened in the last bear market from 2000 to 2002. Alternative assets posted gains despite the stock market's steep losses in those years, helping the largest endowments outperform their smaller peers. (Reporting by Aaron Pressman; Editing by Tim Dobbyn)