The other day I came across a compelling report on the portfolio performance of several large U.S.-university endowments (i.e., pools of money and/or property that have been donated to a given university from past students). These funds have soundly beaten traditional portfolios over the past decade, and they've done it with considerably less risk/volatility.
How? By taking a fundamentally different approach to asset allocation; specifically, by investing in alternative assets such as hedge funds, private equity, managed futures, real estate (multi-unit residential, commercial, industrial), commodities, customized structural products, infrastructure, etc.
How much outperformance are we talking about? Consider the data in the table above.
What I find most interesting here is the performance advantage versus the traditional "60/40" equity/fixed income portfolio. This is the "go-to" portfolio for many investors, and I believe we're coming into a time when it may well be obsolete. As the above data makes clear, a possible solution to this problem is to increase your allocation to alternative assets.
The alternative assets topic has been an important one within the HNW population for the past several years. More and more HNW investors have become aware of the performance of these endowment funds – and more of them have looked to emulate these large endowment funds in their own portfolios.
In my experience, this has less to do with performance (although that's an important goal) than it does with diversification and downside or "value at risk" (VAR) protection.
This attitude goes back to the 2008 market crisis; one of the most striking things about that crisis was that there weren't a lot of places to hide. That is, most asset classes declined at the same time or had significantly increased correlation. One of the things these large endowment funds were able to do was to sidestep the crisis, because of their allocations.
This has become a significant issue for HNW individuals, as well as the broader investment public.
As the world becomes more economically interconnected, assets have become more correlated, and it has become more and more difficult to find assets that "zig" when everything else "zags."
Should we all be investing like these super endowments? Well, yes and no.
I'm not sure if it's possible to emulate these endowments exactly, even if you wanted to. Even though there are indices and ETFs that allow investors to track the returns of some alternative asset classes, it's very difficult to copy them exactly. And of course, their size gives them access to opportunities that are unavailable to most investors.
This is particularly true in the private equity space, which as you can see from the allocation graph, remains a core foundation of the endowment portfolio.
More importantly, these endowments have different investment goals than you or I do. Their investment horizons span decades, and they don't have the same liquidity or cash flow requirements as people do.
All that said, I think nearly every investor would be well served by an allocation to alternative assets.
It's certainly what HNW individuals have been doing more and more.
For the non-HNW investor, I suggest an allocation to "alternative assets" of perhaps 5% to 10% hedge funds, 5% to 10% private equity and perhaps another 5% to commodities.
An equally viable option would be to find a professional manager that works in the alternative space, who can pursue such opportunities for you. •
