Small Foundations Get Adventurous

Craig Karmin profiles Edward Hunia, who runs the $3.8 billion Kresge Foundation. It's done well of late, thanks partly to bearish bets and an investment with John Paulson: a 16.3% total return over the past five fiscal years, and a 9.3% return in the most recent year.

We're not told how well Hunia has done overall since he joined in 1992, although we do know that assets have risen from $1.2 billion since then. That puts him pretty much in line with the S&P 500 after all the foundation's expenditures, which is impressive, unless there were further donations to the fund in the interim.

In any event, Hunia's now retiring to a life of consultancy:

After Kresge, he would like to help smaller foundations and endowments outperform their larger brethren. His advice: Start by reducing fixed income and dropping active equity managers, "since you can't find a manger who can consistently outperform." Then he would work on getting the right hedge-fund mix and proper use of derivatives.

I agree that it's impossible to find an equity manager who will consistently outperform, but I'm interested in the fact that Hunia is reluctant to extend that insight to hedge-fund managers as well. After all, hedge-fund managers are much more expensive than most equity-fund managers, which means they need to outperform even more in order to make an investment worthwhile.

But of course investment officers at foundations are, in a sense, hedge fund managers themselves. Enough so that they're willing and able to ignore their own advice. This, remember, is coming from a man who doesn't like fixed income:

He believes residential mortgages look attractive at current prices, and has been investing in distressed mortgage-debt funds. Mr. Hunia thinks his position in distressed debt could grow to as much as 15% of his total fund assets, up from 4% now.

But probably distressed debt doesn't count as fixed income: by fixed-income Hunia probably means playing interest rates and yield curves more than credit spreads. Essentially Hunia seems attracted to the exotic: no boring bonds, few boring equities, and lots of interesting hedge funds and derivatives and "little-known niche investments that have been widely overlooked". Is that really a good strategy for small foundations who might not have the necessary skills to juggle such investments? I'm not convinced.