Colleges Love Hedge Funds (and Venture Funds, and …)

There is a fascinating article in the Chronicle of Higher Education on the continuing asset shift at many colleges and charities into alternative investments (i.e., hedge funds, private equity, venture capital, etc.). The Purdue example is particularly striking:

Purdue University … has rapidly increased its
alternative investments and plans to nearly double its allocation to
alternatives again in the near future. In 1999 it had almost nothing
invested in nontraditional assets, and nearly 90 percent of its
endowment was invested in stocks â€” which put the institution in a
precarious position when the stock market tumbled. The endowment
dropped nearly $300-million, to $1.1-billion, over the three years
ending in June 2003, which prompted Purdue to diversify.

In 2005 the university had 22 percent of its assets in alternative
investments, including real estate, and the $1.34-billion endowment
earned 11.9 percent over all for the fiscal year ending in June.
Purdue’s investment committee approved a plan in April that calls for
the university to put 39 percent of its assets into alternatives within
three to five years.

Get that? Purdue has gone from zero percent in 1999, to 22% in 2005, and is heading for a 39% allocation to alternative investments by 2011. Remarkable stuff.

Related posts:

  1. Uncorrelated Correlated Hedge Funds
  2. Nassim Taleb, the Titanic, and Hedge Funds
  3. Nobel-Winning Hedge Funds
  4. First-Tier Venture Funds … Or Bust!
  5. David Swensen’s Private Equity Imprimatur

Comments

  1. Franklin Stubbs says:

    Makes sense when one remembers that hedge funds are not an alternative asset class but an alternative compensation scheme.
    The big drawback of hedgie compensation is the fund’s temptation to gamble big when the chips are down. But the advantages outweigh that risk, especially if the selection process is rigorous.
    It simply makes more sense to have the fund manager putting his money where his mouth is, in terms of personal net worth invested in the fund. The superiority of the hedgie compensation scheme will continue to attract the best managerial talent far into the future, and the pay for performance model gives incentive to keep assets under management at a workable level.
    In marked contrast, the mutual fund asset-gathering strategy…. grow the pile as big as you can and collect a fixed fee… invites timidity, groupthink, and elephantiasis.

  2. optimus says:

    Uh, so because they don’t want to get burned by bubbles, they’ve put their cash into real estate?
    Good luck with that.

  3. RK says:

    The rest of the article is behind a subscription wall. Did the article say what the targeted annual return over all Purdue’s investment is over the next 10 years? Presumably, Purdue is shooting for an equal or better return than S&P500 or Russell 3000 at a lower volatility.

  4. Reminds me of the endowment funds love affair with Venture Capital during the 90s