Courtesy of the New York Times, a cautionary tale about the endowment investment strategies of large universities–which have underperformed the market in recent years. It turns out, surprise, surprise, that high returns were actually linked to high levels of risk (not to mention liquidity risk). And that the management fees at hedge funds and the like are much higher than for low-cost index funds and the like. And the hedge fund managers collect 20% of the up-side return and a percentage of the assets under management (they don’t reimburse for downside returns though, of course).
Today, it’s hard to find a college or university that stuck with the older and far simpler allocation between stocks and bonds. Hedge funds alone currently have what is estimated at over $2 trillion in assets, much of it from large institutions.
College and university endowment returns for the most recent fiscal year, which ended June 30, are starting to roll in. And in many cases, they warrant a grade of “C” at best, and in some cases, an “F.” Harvard reported a 0.05 percent loss and a drop in its endowment of over $1 billion in the same period, even as a simple Standard & Poor’s 500 index fund gained about 5.5 percent. Harvard’s endowment decline is more than the entire endowments of roughly 90 percent of all colleges and universities.
Even more startling, data compiled by the National Association of College and University Business Officers for the 2011 fiscal year (the most recent available) show that large, medium and small endowments all underperformed a simple mix of 60 percent stocks and 40 percent bonds over one-, three-and five–year periods. The 91 percent of endowments with less than $1 billion in assets underperformed in every time period since records have been maintained. Given the weak results being reported this year, that underperformance is likely to be even more pronounced when the fiscal year 2012 results are included.
Sort of makes you wonder why, if these funds are so risky and expensive while returning below-market returns, universities persist in investing so much money in them.