By Elaine Gast Fawcett on behalf of ASF

Some small-staff foundations are turning to hedge funds to diversify their portfolios and stabilize returns in a volatile market. Is your foundation saying yes or no to hedge funds for the right reasons?

Once a little-known corner of the market, hedge funds are becoming increasingly mainstream among nonprofit investors including foundations, college endowments, and the like. Yet investors have many misconceptions.

According to Brian Gray and Alan Lenahan of Fund Evaluation Group, LLC, here are some of the popular myths:

• Hedge funds are high risk. This is something you may have heard in the media. In fact, the goal of most hedge funds is to reduce risk, but that doesn’t necessarily make for an exciting news story. What can be seen as risky is the illiquidity and lack of transparency.

• Hedge funds are shady, fly-by-night, unregulated operations. Historically, the SEC has monitored hedge funds less because they private businesses that require investors to be financially knowledgeable. Today, however, any hedge fund with $100 million or more under management has to be registered with the SEC, and is subject to exams, audits, and regulation.
• All hedge funds managers have aggressive, Type A personalities. Whereas the media may focus on a few maverick hedge fund managers, there are just as many academically minded, risk-conscious, low-key individuals who manage money conservatively.
• Hedge funds are a panacea. It’s true that hedge fund managers have more strategies at their disposal, but that doesn’t mean they are skilled or know how to protect money. For a hedge fund to be successful, it takes hard work, a lot of expertise, great systems, and great people. There’s nothing magic about hedge funds—and, like any investment, there are no guarantees.

Read more about hedge funds as a tool to stabilize returns.

Related resources

• ASF’s resources on foundation investing
• ASF’s Investments Collection, a series of primers for anyone who manages foundation investments
• Minding Your Philanthropic Assets: Quarterly Market Update, a conference call on July 23

Elaine Gast Fawcett helps foundations tell their story, educate their stakeholders, and move their mission forward. For 12 years, she has worked nationally to strengthen the philanthropic and nonprofit sectors as a communications and grantmaking consultant. Originally from the Maryland/DC area, Elaine now lives in the San Francisco Bay Area with her husband Ted and toddler Scarlett. Reach Elaine at [email protected] or on Twitter @4WindsWriting.