The University of Connecticut’s endowment is turning away from hedge funds and embracing a cheaper way to mitigate risk in its $634 million investment portfolio.
The UConn Foundation sold almost all of its hedge fund exposure during the most recent fiscal year and bought so-called buffer ETFs, said David Ford, chairman of the investment committee.
The increasingly popular exchange-traded funds, which use options to protect against losses while capping upside gains, have amassed more than $58 billion in assets, almost all within the past three years.
Market watchers say it’s a sign of growing institutional adoption of the nascent fund strategy, one that could help the ETF industry, largely known as a beacon for retail investors, make further headway with sophisticated money managers overseeing trillions of dollars.
To Ford, hedge funds have become a “victim of their own success,” with many growing so large that returns have suffered, particularly compared to the years after the late David Swensen of Yale University revolutionized endowment investing by incorporating alternative strategies into asset allocations.
Ford says buffer ETFs are a cheaper and easier way to lessen portfolio volatility relative to using a hedge fund or structuring a bespoke trade, and come with the benefit of improved liquidity.
“This takes the complexity out of hedging, or most of the complexity,” Ford said. “Instead of having to go to an institutional desk and say, we want to design the following options trade, it’s already prepackaged and trading.”
Top hedge funds have often historically charged clients 2% of assets managed and 20% of profits. UConn has purchased buffer ETFs overseen by Innovator Capital Management, where the average fee for the products is 0.8%, according to data compiled by Bloomberg.
