The following are in response to Robert Huebscher’s article,The Futility of the Endowment Model, which appeared last week:
Dear Editor,
What an incredibly disappointing and misleading article. At the beginning of the article, you state that "the apparent alpha comes from the mere fact that they [endowments] hold assets like private equity and hedge funds." That's the whole point of the endowment model – diversify across various performance-oriented assets classes to increase total risk-adjusted return. Your statement proves the model's success, not its failure.
Various other studies, including several in the Journal of Wealth Management, have documented that endowments are not particularly good at selecting managers outside of private equity and, to a lesser degree, hedge funds. But again, this argues in favor of the endowment model because success results from its strategy or the model itself rather than a magical ability to select outstanding managers within particular sectors.
The endowment-model strategy has always been about diversifying a portfolio across performance-oriented assets with lessened cross correlation. It is not an attempt to maximize returns through tactical allocations or market timing. Certainly, endowments attempt to select the top managers, as any responsible fiduciary should, but that has never been the stated key to success of the approach.
The article discusses some perceived limitations of endowment practices. While this may be debatable, the finding should not be surprising given that many endowments included in the study are surprisingly small given the sample size. Including 279 endowments would mandate an inclusion of endowments under $200 million in assets with only a part-time management committee, or one or two investment professionals on staff, who often answer to a relatively unsophisticated board. Their strategies are often very simple and frequently differ significantly from the approaches of the larger, and generally more successful, endowments. The fact that they are successful reinforces the success of the model, not its shortcomings.
In the latter part of the article, there's a discussion of the shortcomings of consultants. While this may be highly accurate, it's a totally different issue. Moreover, in spite of the noted limitations of consultants, the returns enjoyed by those following the endowment model are encouraging endowments to continue to adopt more of the approach, rather than less.
I appreciate your bringing an interesting article to light. Unfortunately, your reporting of the facts and your interpretation of the findings of the study diminish your publication and drag down the industry.
Daniel Wildermuth
Chief Executive Officer
Kalos Financial
Alpharetta, GA
Dear Editor,
Great article today on your site. We at Greenline Partners couldn't agree more with the conclusions cited by the various studies. Our former clients, from when we were at Bridgewater, continue to remind us that their hedge fund and private equity performance has been poor – yet they continue investing in these expensive asset classes. All at our (and the taxpayers’) expense!
These results are not surprising to us, as private equity is just public equity with more debt and less liquidity and transparency. Therefore, it is an expensive and highly correlated alternative to public equities. Hedge funds, too, on average have proven to be more of the same – low-returning and highly correlated to equities. Furthermore, as numerous studies confirm, consultants and institutional investors have shown little skill in selecting the best managers, turning these alternatives into opaque, expensive and low-returning versions of the investments we all already own and therefore offering no diversification benefit to traditional portfolios.
I thought you might enjoy this article that uses the Yale model as the basis for its Portfolio Whiteboard Project idea. The focus of the project has turned to governance and learning from the investment process of Swensen/Yale, rather than the asset allocation. Yet the irony of the whole thing is the discussion starts with forming "themes" without realizing this is just another form of alpha with zero expected value. Whether people call it "predicting the future," "themes," "market timing" or "global macro," it's all the same thing.
The Portfolio Whiteboard Project may be of value to advisors.
Maneesh Shanbhag, CFA
Greenline Partners
New York, NY
