“We believe that hedge funds are an invaluable tool for non-profit investors,” Pruit says. “Bonds do okay when equity markets roll over, and high-quality bonds do well in an inflationary environment, but the greater allocation is better placed in hedge funds because the return potential is better.”

Investment committees should confirm the role of inflation-sensitive investments in the endowment or foundation portfolio, Pruit says.

“The concept of private debt seems to be gaining momentum among non-profit investors, “Pruit says. “Investors are separating the concept of liquidity from safety with fixed income, and that’s leading to greater allocation to things like private debt.”

Pruit says that investment committees should take extra time to conduct due diligence on investment opportunities like private debt and hedge funds. Endowments and foundations must first establish due diligence best practices, according to Mercer.

“A number of organizations are embracing alternatives that are less transparent and use different regulatory rules than traditional investments,” Pruit says. “There are many more things that could go awry with these investments; the level of control is a lot lower. Investment committees can’t process away every possible risk, but we think there’s more that they can do to protect themselves.”

Investment committees should attempt to realistically measure their liquidity needs and to design their portfolios accordingly. Pruit says that many non-profits aren’t taking advantage of their ability to access illiquidity premiums.

“From a liquidity planning standpoint, investors have to be able to meet the mission of the endowment or foundation, but they’re paying too high a price for liquidity,” Pruit says. “Do they really need 50, 60 or 70 percent of their portfolio liquid to sell tomorrow? In most cases, their annual cash need is 5-7 percent of their current asset base. These are perpetual pools of capital that are going to be around for a long time.”

Mercer has identified portfolio benchmarking as an area where many non-profit investors need to spend time and energy in 2016.

“Benchmarks are the primary quick look around portfolio expectations,” Pruit says. “We see a lot of endowments and foundations focusing on comparisons with their peers,” Pruit says. “There are too many variables between organizations, even those with similar goals and objectives have different personalities and biases.”