Yale Says ‘Alpha Is Not Dead’ as It Defends Investment Model

Yale University, the world’s second-wealthiest school with a $20.8 billion endowment, said it can still beat market returns, known as generating alpha, as it seeks to stand out from other investors.

The university’s investment office, run by David Swensen, said in an annual report that “alpha is not dead,” and that it remains committed to allocating much of the portfolio to alternative assets such as private equity. Yale had a 12.5 percent return on investments in the year ended in June, beating the 11.3 percent average for foundations and endowments, according to Wilshire Associates.

“The endowment was able to generate alpha even as alternative assets became increasingly capitalized and competitive,” the investment office said. “While alpha is not dead, opportunities to access it may not be available to all investors.”

While Yale, based in New Haven, Connecticut, and other wealthy universities have transformed how endowments are managed, they suffered some of the deepest losses in 2009 in the wake of the global financial crisis and were left short of cash because of large holdings of hard-to-sell assets. They have failed to distinguish themselves since as equity and other alternative assets have trailed returns generated by investments in public equities and bonds.

Traditional Portfolios

Schools with less than $25 million of assets that have more traditional portfolios either matched or topped the average returns generated by universities with more than $1 billion in the past three years, according to a report from the National Association of College and University Business Officers and Commonfund. The report found the average endowment investment return in the year through June was 11.7 percent.

Of the eight schools in the Ivy League, which includes Yale, the University of Pennsylvania had the top return last year at 14.4 percent while Harvard University, the world’s richest, had the lowest at 11.3 percent.

Traditional portfolios are outperforming at the moment because the world’s central banks have been pumping liquidity into banking systems since the credit crisis, said William Jarvis, managing director of the Commonfund Institute. Over time, more diversified portfolios should generate top returns, he said.

“The game is not a one-, three- or five-year game,” said Jarvis, whose institute is part of the Wilton, Connecticut-based money manager Commonfund. “The game is a 20-year game or even longer.”

Asset Allocation

Universities allocated on average 53 percent of their portfolios to alternative strategies in 2013, down from 54 percent the year before, according to Nacubo and Commonfund. The allocation had been increasing by 1 percentage point each year since 2009 when the two groups started collecting the data.

Yale’s Investment Committee, at its June 2013 meeting, increased its target for investing in absolute return, or hedge, funds to 20 percent from 18 percent, according to the report. It lowered the private equity target to 31 percent from 35 percent and increased foreign equity to 11 percent from 8 percent.

“During periods when traditional portfolios outperform, critics are quick to cast aspersions on the Yale model,” the investment office wrote. “But traditional 60 percent equity/40 percent bond portfolios are not diversified, not equity-oriented, and not appropriate for long-term investors.”

Yale also said it has collected $36 million in donations in Swensen’s honor. Swensen, 60, has been the university’s chief investment officer since 1985 and pioneered the alternative investment strategy. He was diagnosed with cancer in 2012 and took a temporary leave of absence.

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