over 3 years ago • 2 mins
College endowments’ growing penchant for “alternative” investments may be backfiring – but studying the most innovative strategies could pay off 👨🎓
Big colleges are no strangers to financial innovation – just look at Oxford University’s 100-year bonds. And since the turn ofthiscentury, the big US players in particular, led by Yale University, have enthusiastically embraced alternative investments beyond stocks and bonds in a bid to get their billion-dollar-plus endowment funds delivering superior returns.
Investing in the likes of leveraged buyout (LBO) private equity funds helped colleges consistently beat benchmarks between 1999 and 2008. But new analysis of the biggest 43 US endowments’ returns over the last decade shows that none have performed particularly well since – and a quarter did significantly worse than a simple 60/40 passive portfolio of stocks and bonds.
This dreary decade coincided with public-sector pension funds scrambling to copy the forward-thinking endowments – and the greater their exposure to alternative investments between 2008 and 2018, the worse those pension funds have done 😞
You might think that the experience of the past decade means alternatives should be avoided. Indeed, Yale’s own investment chief recommends that those of us without $30 billion at their disposal stick to simple index trackers.
But there’s an interesting addendum. The very biggest college funds – and those with the biggest proportion of their endowment in alternatives – have done better than the lackluster average performance of such investments recently would suggest.
That may be due to not just the skill of those managing the largest endowments, but their ability to track down the hottest new opportunities well before others. Closely studying the investment strategies of the likes of Yale and following their regular updates could therefore put you on to futuristic trends at an early stage.
In the meantime, you can also check out our newly revamped Pack on Alternative Investing for more on up-and-coming markets... 😉
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