Interspecific hybrid endophytes of the genus Epichloë (Ascomycota, Clavicipitaceae) are prevalent in wild grass populations, possibly because of their larger gene variation, resulting in increased fitness benefits for host plants; however, the reasons are not yet known. We tested hypotheses regarding niche expansion mediated by hybrid endophytes, population-dependent interactions and local co-adaptation in the woodland grass Hordelymus europaeus, which naturally hosts both hybrid and non-hybrid endophyte taxa. Seedlings derived from seeds of four grass populations made endophyte free were re-inoculated with hybrid or non-hybrid endophyte strains, or left endophyte free. Plants were grown in the glasshouse with or without drought treatment. Endophyte infection increased plant biomass and tiller production by 10-15% in both treatments. Endophyte types had similar effects on growth, but opposite effects on reproduction: non-hybrid endophytes increased seed production, whereas hybrid endophytes reduced or prevented it completely. The results are consistent with the observation that non-hybrid endophytes in H. europaeus prevail at dry sites, but cannot explain the prevalence of hybrid endophytes. Thus, our results do not support the hypothesis of niche expansion of hybrid-infected plants. Moreover, plants inoculated with native relative to foreign endophytes yielded higher infections, but both showed similar growth and survival, suggesting weak co-adaptation.