University Endowment Sued for Under performing the S&P 500 • Hacker News Board

Re: University Endowment Sued for Under performing the S&P 500

#61

Post by ac29 » Thu, Aug 20, 2020, 4:41 AM UTC

DevKoala wrote: post #16

Some of these large asset managers are awful. Last time I was looking at the people managing California Public Employee Retirement System fund, and it was making abysmal moves all over the place. I felt sorry for the people with their savings there.

CalPers had returns of 4.7%, 6.7%, 8.6%, and 11.2% for the past 4 fiscal years. This is better than a 60/40 portfolio, which doesnt seem unreasonably conservative for a pension fund to me. Of course in hindsight you can see how they could have done better, but they certainly could have done worse.

Re: University Endowment Sued for Under performing the S&P 500

#62

Post by smabie » Thu, Aug 20, 2020, 4:52 AM UTC

gvhst wrote: post #56

smabie wrote: post #22

Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and…

Isn't sharpe invariant to leverage? If I lever up a position 2x my return doubles as does the volatility (StdDev) of the position. Metrics like alpha are better able to tease out if a portfolio is simply levered to a market factor.

Sharpe is mostly considered invariant to leverage, but it's not strictly true. Volatility drag starts to eat more and more into your returns as you lever up.

Re: University Endowment Sued for Under performing the S&P 500

#63

Post by smabie » Thu, Aug 20, 2020, 5:07 AM UTC

zhoujianfu wrote: post #58

throwawaygh wrote: post #55

Earlier quoted context omitted.

Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards. The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different. I agree with you in general -- both that the active management is dumb and also the most proba…

Yeah, but it seems like any sort of “permanent fund” where the timeline is infinite should be doing really aggressive, long-term, illiquid stuff, right? Investing like a 22 year old. And then any liquidity needs you need for annual distributions you handle via loans. I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original inves…

Corporate debt often looks like what you're describing. The principle is rarely called and the loan can be extended virtually forever (unless the bank decides you're too risky).

There are certainly other ways a school could run its endowment, sure. In fact, the way things are usually done is perhaps far from optimal.

But you don't want to that guy who gets fired because you did some crazy stuff. These institutions are perversely risk adverse, and the investment through consensus model makes it hard to do anything different.

Re: University Endowment Sued for Under performing the S&P 500

#64

Post by rmrfstar » Thu, Aug 20, 2020, 5:59 AM UTC

smabie wrote: post #15

Lazare wrote: post #8

Earlier quoted context omitted.

> Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities. That does make some sense, but actually endowments typically invest quite a bit in in riskier asset classes. From https://caia.org/aiar/access/article-1160 : > The average US endowment fund held roughly 70 per cent in traditional asset classes (public and…

The alternative assets are less risky, because they have less market exposure, and when uncorrelated (or less correlated) return streams are mixed together, the volatility of the portfolio is reduced. It's very common that a shitty investment with high volatility and low returns can actually improve the risk adjusted returns of a portfolio. Like gold, for example. Also, hedge funds are significantly less risky than h…

> The alternative assets are less risky, because they have less market exposure

If you're including PE in there, you are way off base. According to the assumptions in BlackRock's Aladin platform, global buyout has an equity beta of something like 1.6.

Re: University Endowment Sued for Under performing the S&P 500

#65

Post by smabie » Thu, Aug 20, 2020, 6:28 AM UTC

rmrfstar wrote: post #64

smabie wrote: post #15

Earlier quoted context omitted.

The alternative assets are less risky, because they have less market exposure, and when uncorrelated (or less correlated) return streams are mixed together, the volatility of the portfolio is reduced. It's very common that a shitty investment with high volatility and low returns can actually improve the risk adjusted returns of a portfolio. Like gold, for example. Also, hedge funds are significantly less risky than h…

> The alternative assets are less risky, because they have less market exposure If you're including PE in there, you are way off base. According to the assumptions in BlackRock's Aladin platform, global buyout has an equity beta of something like 1.6.

I mean, that's just one, old, moderate sized fund. I couldn't tell what PE's total beta exposure is, but I would unsurprised if the variance between different funds is very, very, large.

Moreover, beta doesn't capture the whole picture. By any chance do you know what the funds correlation to the broader equity market is?

Re: University Endowment Sued for Under performing the S&P 500

#66

Post by rmrfstar » Thu, Aug 20, 2020, 6:41 AM UTC

smabie wrote: post #65

rmrfstar wrote: post #64

Earlier quoted context omitted.

> The alternative assets are less risky, because they have less market exposure If you're including PE in there, you are way off base. According to the assumptions in BlackRock's Aladin platform, global buyout has an equity beta of something like 1.6.

I mean, that's just one, old, moderate sized fund. I couldn't tell what PE's total beta exposure is, but I would unsurprised if the variance between different funds is very, very, large. Moreover, beta doesn't capture the whole picture. By any chance do you know what the funds correlation to the broader equity market is?

That is their assumption for global buyout as an asset class. You can grab their allocation assumptions at [1]. There is a "Download data" button on the page with the assumptions for a variety of base currencies.

You can also back out a ballpark beta from the MM theorems and what we know about company leverage post LBO. See [2] foot note 6.

[1] https://blackrock.com/institutions/en-us/insights/charts/cap...

[2] https://www.aqr.com/Insights/Research/White-Papers/Demystify...

Re: University Endowment Sued for Under performing the S&P 500

#67

Post by smabie » Thu, Aug 20, 2020, 7:03 AM UTC

rmrfstar wrote: post #66

smabie wrote: post #65

Earlier quoted context omitted.

I mean, that's just one, old, moderate sized fund. I couldn't tell what PE's total beta exposure is, but I would unsurprised if the variance between different funds is very, very, large. Moreover, beta doesn't capture the whole picture. By any chance do you know what the funds correlation to the broader equity market is?

That is their assumption for global buyout as an asset class. You can grab their allocation assumptions at [1]. There is a "Download data" button on the page with the assumptions for a variety of base currencies. You can also back out a ballpark beta from the MM theorems and what we know about company leverage post LBO. See [2] foot note 6. [1] https://blackrock.com/institutions/en-us/insights/charts/cap... [2] https…

Thanks, I thought you were talking about the global buyout fund. Will check it out. AQR and Blackrock do really great stuff

Re: University Endowment Sued for Under performing the S&P 500

#68

Post by Jaxkr » Thu, Aug 20, 2020, 8:11 AM UTC

Hey, I currently go to CU! Weird to click this and see a picture of our library.

Re: University Endowment Sued for Under performing the S&P 500

#69

Post by impendia » Thu, Aug 20, 2020, 8:44 AM UTC

zhoujianfu wrote: post #44

gnu8 wrote: post #38

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings). Maybe it is time to confiscate these endowments and use them to liquidate studen…

I never understood it before, but I’m on the board of a small private college, and I finally understand that actually to balance the budget each year they need the revenue from tuition, annual gifts, AND a 4-5% distribution from their endowment. To be competitive, a school has to maximize their revenue, and that includes all sources. Then they have to spend it all each year.

Interesting. Do you have any insight as to why college expenses are so high, and continuing to skyrocket?

Tuition at private colleges in the US is typically around $50,000-60,000 a year, exclusive of room and board. This seems absurd to me. And yet apparently it's not even enough to cover expenses.

Where is the money going?

Re: University Endowment Sued for Under performing the S&P 500

#70

Post by throw0101a » Thu, Aug 20, 2020, 1:15 PM UTC

wahern wrote: post #57

throw0101a wrote: post #37

Earlier quoted context omitted.

> An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and have a moderate but stable return stream. Over the last ten years, all the fancy-pants portfolios that Ivey League endowments used have generally under-performed a 60/40 portfolio: * https://www.markovprocesses.com/blog/ivy-league-endowments-f... * https://www.institutionalinv…

> > Dahiya and Yermack found that the performance of the typical endowment fund [from 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever. As a non-expert this intrigued me so I found an online calculator for that period ( https://dqydj.com/treasury-return-c…

Ben Carlson covered this last year:

> Most investors assume you want to own negatively correlated investments that move in opposite directions. But what you really want is assets that have a positive expected return profile with correlations that change over time depending on the market environment.

* https://awealthofcommonsense.com/2019/07/26793/

The equity-bond correlations have see-sawed between +0.6 and -0.6 over the decades:

> Since 1945, the S&P 500 has been down in 16 out of 74 years, with an average loss of -11.7%. In those down years, 5-year treasuries were positive 15 out of 16 times, with an average gain of 6.2%. The last time stocks and bonds were down in the same year was 1969, when the S&P fell more than 8% while 5-year treasuries were down less than 1%.

* Ibid.