Investment income rebounded.

Most nonprofits bounced back, as did the stock market in general last year, while also exploring alternative investments, such as hedge funds and real estate.

"Investment income was pretty much on the rise across the board ... and especially the increase in investment portfolios," said Daniel Romano, executive director, tax, for Grant Thornton's northeast higher education and nonprofit practice. "A lot of that has to do with the move toward alternative investments which a lot of these organizations, they're large enough with their endowments, are getting into. Hedge funds, whether it be domestic or off-shore hedge funds, that seems to be the way of going for the future for a lot of these organizations," he said.

On average, charities had less than 10 percent of their portfolio in alternative investments or hedge funds a few years ago while now some might have 30 to 50 percent, said Frank Kurre, managing partner of Grant Thornton's national nonprofit practice. "It's scary, as we've been alerting our clients to.

"People don't really understand the nature of hedge funds and how they work, and then all of a sudden they can get stung. You can run up a 60 percent gain in a year but you could lose the entire investment in a year too," Kurre said. "If you have future capital commitments that you have to make, there's a potential that you would have to possibly throw that money in, and throw additional bad money after the losses."

"This to me is one of the high-risk areas in the not-for-profit world right now. You've got a lot of institutions that have quickly invested in these things and in many of them there are capital commitments going out many years. I've got clients that have to pay into these limited partnerships for up to 10 years in the future ... so they're locked in, do they really realize what they're getting into."

"There's a whole slew of legal and tax implications for these things," Romano said.

Some colleges and universities taking the risk and investing in hedge funds and REITs have done pretty well, according to Allan E. Goodman, president and CEO of the Institute for International Education (IIE) in Manhattan. The institute doesn't invest in hedge funds, he said, but did see its investment income skyrocket from $237,688 in FY 2004 to more than $2.5 million last year--an increase of almost 1,000 percent. It was depreciation in stocks sold that explains the aberration in FY 2004, while the 2005 figures are closer to normal.

Goodman said the organization's holdings are very diversified and it increasingly has looked to index funds, "lowering dramatically the cost. That's worked pretty well for us, and it's driven by a belief that over lots and lots of years, active managers don't do a wit better than index funds," though in the short-term, some active managers can do much better.

The United Negro College Fund (UNCF), No. 69, hasn't quite dived headfirst into the hedge fund pool, but it is dipping a toe. About a quarter of its balance portfolio, which had a value of about $71 million in 2005, consists of alternative investments, Chief Financial Officer Hubert C. Graves said.

UNCF started investing in hedge funds almost three years ago, but Graves said the Fairfax-Va.-based nonprofit diversifies the rest of its balance portfolio, with another quarter of it in some form of fixed income and half in traditional equities.

"Any organization is going to have some successes and some failures," Graves said. "Certainly there's an element of risk, however, the particular fund of funds/hedge fund that we're invested in have long track records. Since it's a fund of funds, we're not expressly in one hedge fund as an investment vehicle."

Nonprofit organizations have been influenced in some way by the results that some Ivy League universities accomplished with their investment results during the early part of this decade, Graves said. Institutions like Harvard and Yale were very aggressive in alternative investments during periods when classic portfolios suffered losses, he said, though lately they've had substantial gains.

Most nonprofits have reaped some benefits of the market's resurgence in recent years.

The 138-percent jump ($10 million to $24 million) in investment income for Disabled American Veterans (DAV), headquartered in Cold Springs, Ky., was due in part to restructuring investment portfolios, liquidating some investments and adding three new money managers, according to comptroller Anita Blum. DAV generally restructures its portfolios every three years, barring any sudden declines, she said, examining overall allocations and managers.

The hike in income was a result predominantly of selling securities, resulting in realized gains of $17 million, compared to $3 million the year before. DAV's average investment income is closer to $10 million or $12 million annually, Blum said.

Ed Lloyd, chief financial officer for the U.S. Fund for UNICEF, preaches a conservative investment policy that's safe but steady. Investment income for the New York City-based nonprofit has been climbing the past several years, up 57 percent, from $654,743 to more than $1 million in FY05, and expecting to eclipse $2 million in the next fiscal year.

"The money we're raising, we are putting in places while we're waiting to give it to UNICEF. We turn over money to UNICEF pretty quick so it's not like we're holding onto cash," Lloyd said. "But while we have the money, we make sure it's invested wisely. As you get new money in, you are able to invest money longer. It's kind of a laddered approach to investment."

The Leukemia & Lymphoma Society (LLS) in White Plains, N.Y., hired an investment advisement company and between 2004 and 2005 moved its investments from Smith Barney to National City, said Holly Colbert, assistant vice president/assistant controller. LLS investment income tripled from $1.4 million to $4.5 million, thanks to significant income from its Intermediate Government Bond Fund, as well as stronger performances from its securities funds.