In the past two decades, the so-called endowment model has been adopted by hundreds of endowments, foundations and advisors – particularly those serving ultra-high-net-worth clients. By aggressively allocating to illiquid alternative asset classes, those investors hoped to duplicate the results of Yale and other top-tier institutions.

New research exposes the futility of those efforts.

The average university endowment does not earn any risk-adjusted return (alpha) and would have done just as well investing in a 60/40 stock/bond portfolio, according to a new paper, “Do (Some) University Endowments Earn Alpha?”, by Brad Barber and Guojun Wang, professors at the University of California at Davis.

Some elite institutions – like Yale – may appear to earn alpha, according to Barber and Wang, but it does not come from selecting skillful managers or from dynamically changing asset allocations. Instead, the apparent alpha comes from the mere fact that they hold assets like private equity and hedge funds.

But those private equity and hedge fund assets may not really be earning alpha. Barber and Wang cite evidence that private equity doesn’t deliver alpha, and only meager evidence that hedge funds deliver alpha.

Another pair of studies, “How Institutional Investors Form and Ignore Their Own Expectations” and “Picking winners? Investment Consultants' Recommendations of Fund Managers,” by a group of researchers from the University of Oxford, further illustrate the imperfections of the manner in which many endowments are managed.

The first Oxford study shows that institutional investors largely ignore their own expectations about the expected performance of the managers they employ and instead rely heavily on the recommendations of consultants. Those funds recommended by consultants, however, do not significantly outperform other products, according to the second study.

In other words, the consultants upon whom endowments, foundations and many advisors rely add no value.

I’ll look at those studies and conclude with the implications for financial advisors.