As chief investment officer of the Institute for Advanced Study for the past six years, Mark Baumgartner leads a distinctive portfolio that’s dedicated entirely to alternative investments, comprised of a 75/25 hedge funds-to-private markets split.

The Institute was founded in 1930 in Princeton, New Jersey, and is perhaps best known as the academic home of Albert Einstein, J. Robert Oppenheimer, and John von Neumann. The rich history and ambitious mission of the Institute has attracted many prestigious trustees to the board, and the Institute’s endowment strategy has been influenced over the years by investors such as Leon Levy and Bruce Kovner. However, it was Jim Simons who chaired the investment committee when the current strategy was established. Simons asserted that it was best for the Institute to take as little risk as possible while still achieving the stated objectives, and to make use of the Institute’s competitive advantages in sourcing and selecting alpha-generating managers. This strategy led to the current asset mix.

The Institute’s unique asset allocation leads to idiosyncratic challenges that not many other institutional asset managers face.

“The drawback is that it’s different and unconventional, and anyone who’s an allocator knows that it’s tough to be different,” Baumgartner says. “It’s tough being unconventional. If something’s going wrong, you probably don’t have as much visibility into what’s happening as you do with a traditional portfolio. When a typical portfolio drops, you know why. It’s because growth failed or came in below expectations, or something happened in the global equity markets.”

There are benefits, however, to this one drawback of being an entirely alts portfolio. “It offers the ability to be very creative in portfolio construction, it offers a lot of flexibility in how you go about achieving your goals, and it’s not subject to as many constraints as other types of portfolios,” Baumgartner says. “You can fish for returns in different geographic ponds, and different strategic ponds, so in that way it offers the opportunity to be a little bit more creative and flexible.

“When you have the risk shackles cut off, you can target much higher returns. We know we’re not going to make money in every period, but we want to minimize the hole that we dig for ourselves if we do lose money. Consistency of returns is important.”

The strategic asset allocation of the Institute is largely driven by its financial condition and the opportunity set. Because the Institute has a relatively higher than average fixed spending rate, efforts to bolster its balance sheet could provide an opening to shift into riskier investments.

“We let the environment and the objectives decide what the portfolio construction and design look like. If the environment or objectives change, we would change the portfolio accordingly,” Baumgartner says.

“We’re starting a capital campaign to raise funds for the Institute. If that transpires as we expect it to, we’d have additional capital to offset operating cash flows, the portfolio draw rate would go down, and subsequently we could take more risk.  With an expanded risk budget, we could pursue other creative approaches for targeting higher returns, including additional leverage, illiquidity, and concentration.”

Any investor looking to increase their allocation to alternatives need not worry about straying from their intrinsic fiduciary duties, Baumgartner says. “Absolutely we can maintain our fiduciary duty by being 100% in alternatives. We’re completely aligned on the objective, we set up the portfolio to achieve the organization’s goals, and it’s been customized for this particular organization.”

For any institution that may wish to imitate the Institute’s prowess, know that “the key principle is that true diversification matters,” Baumgartner says. “What that means is you need to understand first and foremost the risks you’re taking when investing capital, and ensure those underlying risks are as unrelated as possible. You need to take risk but manage the risk very carefully.”

—Steffan Navedo-Perez