For the better part of ten years I've been hearing about stock brokers using the "endowment model" to build client portfolios. They would smugly mention this to me when they found out that I was a passive investor who accepted the market rate of return using simple low cost no load mutual funds. "We're Merrill Lynch (now bankrupt and owned by a bailed out bank) and we follow the Yale/Harvard endowment model.", they would haughtily mention on the golf course. 
The "endowment model", was espoused by David Swensen, Yale's endowment head, in his book "Pioneering Portfolio Management". Swensen advocated getting away from traditional public securities like stocks and bonds and allocating more money into illiquid and "non-traditional/alternative" asset classes. (Which conveniently generate much higher fees which explains why stock brokers loved this marketing ploy)
He argued that Yale had both a long term investment horizon and access to "special" investment opportunities like hedge funds and private equity. Therefore, it lived in an alternative, unique investment universe that beckoned with market-beating returns. Of course, we know that we all live in the same investment universe and risk and return are related in that universe.
So, for Swensen to have better returns, he was probably taking lots more risk. For the fiscal year ending June 30th, we found out just how much risk that was. For both Harvard and Yale, their endowments had a return of -30% over that period. That was more than double the loss a traditional pension allocation of 60% stock and 40% bonds would have had over the same period. (-13%)
By JOHN HECHINGER
The "endowment model", was espoused by David Swensen, Yale's endowment head, in his book "Pioneering Portfolio Management". Swensen advocated getting away from traditional public securities like stocks and bonds and allocating more money into illiquid and "non-traditional/alternative" asset classes. (Which conveniently generate much higher fees which explains why stock brokers loved this marketing ploy)
He argued that Yale had both a long term investment horizon and access to "special" investment opportunities like hedge funds and private equity. Therefore, it lived in an alternative, unique investment universe that beckoned with market-beating returns. Of course, we know that we all live in the same investment universe and risk and return are related in that universe.
So, for Swensen to have better returns, he was probably taking lots more risk. For the fiscal year ending June 30th, we found out just how much risk that was. For both Harvard and Yale, their endowments had a return of -30% over that period. That was more than double the loss a traditional pension allocation of 60% stock and 40% bonds would have had over the same period. (-13%)
Now the Ivys will argue that their ten year average return was better than a traditional approach. But, growing money is about compounding returns. Getting out of this hole, from a compound return perspective, is going to be difficult. I think a simple index fund approach would have a been a lot better and a whole lot less work.
-Christopher
Harvard, Yale Are Big Losers in 'The Game' of Investing
It's a tie in the Harvard-Yale investment game. Both schools were thrown for colossal losses.
The universities on Thursday said their endowments, higher education's two largest, each lost 30% of their value in the year ended June 30. Combined, the pair of investment pools shrank by a staggering $17.8 billion.
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