Yale: Alpha’s Not Dead, But Finding it is Hard

The world’s second-wealthiest school has used its annual report to defend its investment strategy.

(February 28, 2014) — Yale University has claimed that while alpha isn’t dead, opportunities to access it today may not be available to all investors.

Writing in its annual report, the endowment’s investment office rejected views that the recent drive by other investors into the alternatives markets had reduced the ability to outperform.

The alternatives-heavy and highly illiquid strategy championed by long-time Yale CIO David Swensen has often attracted criticism, not least because the so-called Yale Model led to catastrophic losses of $6.5 billion in 2009—a 24.7% reduction of the endowment's value.

For 2013, the endowment produced a 12.5% return on investments in the year ending in June, beating the 11.3% average for foundations and endowments, according to Wilshire Associates.

The annual report stressed that manager selection and having a sophisticated investment team meant it was confident of recovering the losses from the financial crisis in the near future.

“Yale has consistently demonstrated its ability to identify high-quality active managers. For the 20 years ending June 30, 2013, 57% of Yale’s outperformance relative to the median Cambridge Associates endowment was attributable to the value added by Yale’s active managers,” the report said.

“Over the past two decades, the endowment returned a cumulative 1,152% relative to the Cambridge median of 402%, an outperformance of 5.1% per annum.

“The endowment was able to generate alpha even as alternative assets became increasingly capitalized and competitive. Manager selection remains an important differentiating factor for Yale.”

On average, US universities’ allocated 53% of their portfolios to alternative strategies in 2013, down from 54% the year before, according to data from Nacubo and Commonfund.

Among some of the asset allocation changes made in June 2013 by Yale were the increase in absolute return funds to a target of 20% from 18% and the lowering of the private equity target to 31% from 35%, according to its report. It also increased foreign equity targets to 11% from 8%.

The full report can be found here.

The investment office also revealed it has collected $36 million in donations in Swensen’s honour. Swensen, 60, has been the university’s chief investment officer since 1985, and pioneered the alternative investment strategy.

The gifts raised through the Swensen Initiative will be invested in Yale’s Endowment.

Related Content: Is the Yale Model Dead? and Four Questions to Ask When Jumping into Alternatives  

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