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The Endowment Model - why bother?

  • Posted by: ,  Administrator
  • 11 June 2015
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In the last decade, many Endowments have pursued what has become known as the "Endowment Model".  Many were encouraged by very successful  results from some of the top colleges and universities. But is the Endowment Model worth the hassle? Wouldn't a simple 60:40 allocation be simpler? Some of our most popular endowment papers explore this theme:

1. The Endowment Model: Striking the Balance Between Simple & Complex (NEPC)

This 7 page paper from NEPC describes the so-called Endowment Model and provides advice for small and medium endowments. The report uses a case study example to describe the merits and demerits of different strategies.

2. The Cost of Capital for Alternative Investments

This academic paper, relevant to many endowment strategies, argues that the investments of most HF investors are not covering their true cost of capital. In fact, the authors argue that the characteristic returns from a hedge fund index can be broadly matched simply by holding equities and selling put volatility. Such a strategy would provide far better liquidity and transparency than investing in a portfolio of hedge funds.

3. Defending the 'Endowment Model' (JP Morgan)

In this 24 page document, JP Morgan defends the endowment model - in particular the tendency of endowments to allocate a relatively high proportion of their funds to alternative investments. In particular, the authors seeks to understand and explain liquidity risks, for which many endowments were criticised in the aftermath of the 2008 financial crisis. The authors suggest that, for an endowment with a typical asset mix, a liquidity level within the 6-14% range is optimal.