How the Endowment Funds Beat the S&P 500

by: Mark Hines posted on: March 17, 2008 | about stocks: BX / FIG

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Allocation, allocation, allocation. If you check out the holdings of many of the most successful endowment funds (e.g. Harvard, Stanford, Yale), you will notice only a small fraction of their investments are exposed to the stock market. Why wouldn't you do the same?...

The types of investors that are doing best in our current recessionary environment are those who invest in alternative asset classes. For example, check out the holdings of Dan Knight's absolute return portfolio; He's up considerably during this challenging market. Also, check out the holdings of Thomas Tan's gold portfolio; He too is up big time. It is these types of alternative investments that help the largely successful Endowment Funds consistently beat the S&P500.

Check out the current asset allocation within the Yale Endowment Fund. Yale has about 25% of its total assets allocated to absolute return funds like Dan Knight's portfolio. They also have over about 25% allocated to Real Assets (such as gold) like Thomas Tan's gold portfolio. Yale is famous for its long term track record of top performance.

Historically, it has been very challenging (if not impossible) for individual investors to gain exposure to alternative asset classes because of very high capital requirements. However, in recent years, the opportunities are increasing. For example, some hedge funds and private equity firms are now publicly traded (e.g. Blackstone-BX, and Fortress-FIG). Also, individual investors can gain exposure to alternative asset classes such as commodities and emerging markets via newly created Exchange Traded Funds. Investors can also peek over the shoulder of seasoned pros like long/short investor Dan Knight and gold investor Thomas Tan.

Alternative asset class investments bring new opportunities and risks. I have carefully constructed my personal portfolio to include both US stock market exposure, and alternative asset class exposures such as international equities (developed and emerging markets), commodities, private equity and hedge funds. It is this asset allocation that I believe will reduce my risk and enable me to outperform over the long term.

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