The market crash of 2008-09 was an ugly time for hospitals. Investment portfolios—especially those with a penchant for equities and hedge funds—got clobbered.

Hospitals heaved a sigh of relief as their portfolios recovered in late 2009 along with the market. Still, many organizations are re-evaluating their investment strategies with an eye toward reducing risk. Experts say each hospital must formulate the investment recipe that will best serve its needs.

"What they need to do is think about their investment strategies in relation to their overall business strategy," says Timothy Sheehan, chief operating officer of Cain Brothers Asset Management. "You have to protect yourself against severe market movements."

Hospital investment portfolios on average lost between 20 and 25 percent of value from March 2008 to March 2009, says Richard Clarke, president and CEO, Healthcare Financial Management Association.

The investment falloff contributed to declines in net income at many hospitals, along with downgrades of their credit ratings. The market debacle also sucked value out of pension funds, forcing hospitals to put more cash into the funds at the worst possible time.

The impact varied. At the University of Kansas Hospital in Kansas City, Kan., the investment portfolio declined by only 2 percent during the fiscal year that ended June 30, 2009. The hospital's pool of cash and investments subsequently grew by $11.5 million through the end of October.

"We survived the downturn well because historically we've had a conservative investment portfolio," says Scott Glasrud, the hospital's chief financial officer. "We've had a primarily fixed-income portfolio."

The investment portfolio of Carle Foundation Hospital in Urbana, Ill., dropped by 33.6 percent during calendar year 2008. Its portfolio was weighted toward equities, along with a 20 percent investment in a sophisticated "hedge fund of funds."

Carle turned its portfolio around by "staying the course," says Chief Financial Officer Rob Tonkinson. "We waited for the stock market to come back, which it has. Our return over the three-month period ended Sept. 30 was up 14.3 percent."

Many hospitals responded to the crash by getting out of stocks and investing more in bonds and treasuries. Clarke says that's probably a sound strategy, but those who went that route missed the equities rally. "Each situation is going to be unique, based on the credit situation of the organization, what its cash flows are and how much risk they are capable of taking," he says.