UK charities cautious over alternative assets

An increase in awareness about alternative investments could lead to improved allocations to hedge and private equity funds from UK charities, according to a new report.

( British charities remain cautious about investing in hedge and private equity funds but appear to be intrigued by the asset class, according to a survey published by JP Morgan Fleming, the private bank's investment arm.

The bank surveyed 134 UK charities, which represents £13.9bn in assets ($22.23bn).

About half of the interviewed charities said they felt poorly informed about investing in hedge funds and private equity, although the survey shows a growing interest in the asset classes.

Only four per cent of the charities surveyed invest in hedge funds, although that could change, as eight per cent said they would consider investing in the asset class in the near future, according to the survey. Likewise, three per cent of the charities invest in funds of hedge funds, and twelve per cent would consider investing in them. The survey also shows that 13 per cent of charities invest in private equity, while five per cent of the surveyed organisations would consider investing in it.

About one in five charities have increased their allocation to alternative investments in response to volatile equity markets, according to the survey.

In response to the decline and volatility in equity markets over the last three years, half of the charities have reduced their equity allocations and either increased their exposure to bonds or cash, and 22 per cent of them have increased their allocation to alternative investments, including hedge funds and private equity, according to the survey. About 93 per cent of the surveyed charities have exposure to UK equities, according to the survey. 

“Pressure on income has been a real issue for most charities over the last five years,” James Saunders Watson, head of charities for JP Morgan Fleming Asset Management, said in a press release. “However, a growing interest in alternative investment strategies and a movement towards pooled funds is very encouraging and should help charities to manage their risk return strategies whilst keeping costs down – particularly in these difficult market conditions.”

The Charity Commission for England and Wales, the organisation that regulates charities, recently issued new guidance, saying charities may invest in hedge funds.

“Investment in hedge funds may be 'suitable' for a charity, but it is likely that it would only be so as a small part of a well-diversified investment portfolio,” the documents stated.

The Commission warned charities about risk involved with investing in hedge funds, however, and said that charities investing in hedge funds and private equity may not qualify for tax relief, according to the report.

“The tax treatment of investment in, and returns from, hedge funds can depend on the precise details of the fund and the interest in it. In particular, the investment and return may not come within the tax exemptions provided for charities,” according to the report.