Roger Nusbaum may well have spotted an outbreak - and who can blame would-be imitators when Harvard’s endowment fund is returning 7 to 9 per cent in a bear market, according to the WSJ.
Harvard’s success this year (still below its 15 per cent historical average and the 23 per cent gain it posted last year) was based on a decidedly non-traditional asset mix of 34 per cent in stocks, 16 per cent in bonds, 18 per cent in hedge funds, 17 per cent in commodities (including oil) and 11 per cent in buyout funds, at the start of the fiscal year on Aug. 1, according to Bloomberg.
Cue, Switzerland’s Gottex. The Lausanne and London-based hedge fund, which manages about $16bn, is starting a “global multi-asset investment program that will invest in both alternative and traditional investments similar to the successful US ’super endowments’ ” like Harvard:
The investment program will apply the investment principles of successful US university endowment funds and will allocate an average of 60 per cent or more to alternative assets. The program will be actively managed and will pursue both strategic and tactical investment opportunities across all asset classes: hedge funds, private equity, commodities, long-only equity, fixed income, real estate and other real assets.
There’s a little more detail here, at Financial News Online. The fund, despite being geared towards alternatives, is not shy of equities it seems:
Another 10% will comprise managed commodity futures, 5% will be in real estate, 5% in lending to corporates and 15% in private equity funds.
These allocations take the total invested in alternatives to 65%. The remaining 35% of the strategic fund will be invested in long-only equity and bond funds, with a bias towards small caps and mid caps.
A relatively small sum, equivalent to 5% of the total fund will be invested in derivatives to take advantage of tactical opportunities including currencies and equities.
Imitating an endowment fund like Harvard, however, may be difficult. Harvard Management Company Inc., which has about $35bn under its belt, has enough capital and philanthropic punch to cherrypick the best strategists (like GS’s Edward Forst). It also has a network of frat old boys with which to do business (a la Jack Meyer, now at Convexity Capital Management LP). Add to that, first-to-market advantage, being sublimely aware, as early as last August, that its success would encourage copycats:
Ever larger pools of private and public investment capital are looking to mimic the “endowment approach.” And while imitation may be the highest form of flattery, such migration of capital will inevitably dilute the potency of the approach and complicate its implementation.
This comes at a time when global payments imbalances remain large, correlations among asset classes and managers are rising, the market robustness of certain new derivative products is yet to be tested sufficiently, and a certain amount of hubris seems to influence some market participants who have confidently moved to a ‘just in time’ risk management paradigm.
In view of this, we are resisting the temptation to extrapolate the recent strong investment performance. Instead, it is more prudent to view it as involving a “windfall gain” component. Indeed, the question is not whether there will be market pullbacks, but rather their likely depth, breadth, and duration.
Meeow.
