Alternatives have overtaken US equities to become the largest allocation in endowments and foundations’ portfolios, although allocations to the asset class are likely to level off, according to new research.
The 2026 Endowments and Foundations (E&F) Survey, published by Morgan Stanley Institutional Consulting Solutions, found that, at 36 per cent of portfolios, alternatives represent the single-largest sleeve in E&F allocations.
Non-profit organisations have increased exposure to this asset class to gain access to the diversification, return enhancement and inflation protection benefits offered by private markets and other alternatives, Morgan Stanley said.
Read more: Alts go mainstream in wealth management
The survey showed that alternatives usage among E&Fs is “widespread”, with 98 per cent reporting current or planned exposure, including 68 per cent that intend to use private credit in 2026, up from 66 per cent in 2023.
Real estate usage has increased significantly since 2023, with 74 per cent of E&Fs surveyed intending to allocate to this asset class in 2026, compared to 60 per cent three years ago.
Interest in infrastructure has also grown, with 44 per cent of E&Fs planning to use this asset class in portfolios, up from 38 per cent in 2023.
However, fewer respondents indicated plans to raise alternatives exposure, suggesting that the “rapid growth” of the asset class “could begin to moderate”, the survey found.
Compared with 2023, “notably fewer” endowments and foundations expect to increase their alternatives allocations in the next 12 months, while the percentage of organisations that plan to decrease their alternatives allocations has more than doubled since 2023.
Read more: Morgan Stanley expands wealth push with private credit interval fund
E&Fs also acknowledged some of the challenges associated with using alternatives, with nearly half of respondents (47 per cent) identifying liquidity as the single greatest challenge of using alternatives, up from only 21 per cent in 2023.
Morgan Stanley said the shift reflects “heightened sensitivity to spending needs and cash flows”.
At the same time, concerns about due diligence, portfolio integration, and board approval all saw significant declines.
“The survey results indicate that endowments and foundations are entering a new phase of portfolio management, where liquidity, spending discipline and governance are just as important as long-term returns,” said Jeremy France, head of institutional consulting solutions at Morgan Stanley. “As alternative allocations mature, in our view, the priority is shifting from portfolio construction to resilience – helping institutions meet their obligations while navigating continued uncertainty.”
Read more: Mercer lands $3.8bn for alts fund despite challenging market
