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Matthew C Klein

Time to Ditch the Yale Endowment Model

Investing in illiquid assets to boost returns is inappropriate for institutions that need reliable cash flows. Paying high fees for money managers is even worse.

Institutional investors are different from you and me -- they have a lot more money. Pension plans in rich countries manage almost $30 trillion in assets, for example. This opens doors at the offices of hedge funds, private-equity firms and other expensive money managers and creates opportunities to directly invest in projects inaccessible to regular people, such as dams, natural-gas fields and real-estate developments. But while a select few institutions can generate higher returns -- for less risk -- than we lowly mortals can achieve with low-cost index funds, the average fund should avoid trying to get too creative.

The modern style of institutional investing can be traced to Yale University's David Swensen, who literally wrote the bookon the subject. (Full disclosure, I'm a Yale graduate.) Three core ideas inform his thinking.