The head of Yale University’s $17 billion endowment believes that funds of funds and consultants are bad for the investment community and “facilitate the flow of ignorant capital”.
“Most endowments use fund[s] of funds and consultants, rather than making their own well-informed decisions,” David Swensen, chief investment officer for Yale’s endowment, told The Wall Street Journal today. “If you’re going to invest in alternatives, you should be all in, and do it the way Yale does it – with 20 to 25 investment professionals who devote their careers to looking for investment opportunities.”
Commenting specifically on funds that direct investor capital into hedge funds, Swensen said: “Fund[s] of funds are a cancer on the institutional-investor world. . . The best managers don’t want fund of funds money because it is unreliable.”
Consultants, he said, “make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors”.
Swensen decried other institutional investors’ attempts to mimic Yale’s investment approach, which
pioneered a focus on private equity, hedge funds and oil and gas.
Responding to Swensen's comments, a fund of funds executive who declined to be named for this article argued that institutions smaller than Yale do not have the resources to put together large internal professional investment teams and therefore must tap the pooled resources of advisors and funds of funds to participate in alternative investments.
“It's not practical for everyone to pursue Yale's strategy,” the executive said. “It's hard to beat Yale and Harvard and other top endowments, they have so much money, so much professional talent and resources, they can achieve above-average returns and chase alpha easier than others. If you don't have that, then what? You shouldn't be in alternative assets? What should you be doing then, indexing in public markets? That's not smart either.”
Yale has struggled in the financial turmoil of the past year, with its endowment declining by 25 percent since the end of June, when it was valued at $22.9 billion. The endowment stands at $17 billion.
The endowment’s investments had a negative 13.4 percent return from July through October, Yale’s president Richard Levin said in a letter to alumni in December. Levin said he expected the endowment to remain flat through the 2009-2010 academic year and resume growth after 30 June, 2010.
Yale has committed 18.7 percent of its investment portfolio to private equity, with a target of 19 percent, according to the university’s most recent annual report, published in June 2007.
Harvard’s endowment also took a loss of $8 billion, or 22 percent, in the six months from the end of June, when its portfolio was valued at $36.9 billion. The school expects losses to climb to 30 percent once it has fully updated valuations for private equity and real estate.