Using the NACUBO database of endowment portfolio allocations, Andrew Ang and fellow researchers have backsolved for alpha expectations.
23, 2013) – US endowments have high expectations of private equity, above all
other asset classes, a study has found.
endowment expected private equity to achieve 3.9% alpha above a portfolio of
conventional stocks, as of the end of 2012, the researchers found.
of “Investment Beliefs of Endowments” were Andrew Ang, a Columbia business
school finance professor, Andres Ayala, a PhD candidate at the same institution,
and Yale School of Management finance professor William Goetzmann.
researchers used a Bayesian probability framework to estimate endowments’
implicit beliefs about their ability to capture excess returns. The study’s
core dataset covered asset allocations for approximately 800 US university
endowments from 2006 to 2012, which schools voluntarily reported to the
National Association of College and University Business Officers and Commonfund’s endowment institute.
were less optimistic on hedge funds. According to the study, alpha projections for this asset class averaged 0.7% per year.
expectations for alternative asset classes have increased over time, as have
allocations, despite a dearth of long-term evidence to support a favorable
based on past returns of alternative indexes—the HFRI fund of funds and
S&P’s listed private equity tracker—endowments could have the reverse
expectations, the authors stated.
funds index had an average Sharpe ratio of 0.65 from 1990 through 2012,
trumping the S&P 500 (0.31), Ibbotson’s long-duration government bond index
(0.25), and the MSCI non-US equities index (0.24). From 1994 through 2012, the
private equity tracker earned a Sharpe ratio of 0.14.
expected level of alpha from private was significantly higher than it had been
historically, the authors pointed out.
researchers identified two possible explanations for this: “First, endowments
may think that they have superior selection skills and are able to pick the
managers that generate the highest alpha. This selection skill is not reflected
on historical measures of performance. Second, they may expect higher
conditional risk premia on liquidity or other risk factors in the future.”
entire paper here.
Related content: Andrew Ang profile & SEI: Private Equity in a 'Rut' Since 2008