Copying Harvard

Swiss funds-of-funds firm Gottex has a new gimmick: a fund which "will emulate the investment principles of U.S. 'super endowments'" like those of Harvard and Yale. Actually, it might not be so new: maybe other funds-of-funds have been doing this for a while. But in any case the idea is to massively ratchet up "alternative investments", while bringing the equities component of the portfolio down sharply:

In preparation for the new fund launch, Landes said his team determined that a 65% exposure to alternative investments combined with traditional investments did the best in the long term.

Roger Nusbaum makes the excellent point that this ex post determination might not be worth much at all:

The US stock market is getting close to ten years with no gains. Ten years is a long time. This decade long round trip to nowhere we are in is going to skew a lot studies in the future about how to allocate your assets.

In other words, tell me 10 years ago not to invest in equities, that would have been great advice. Nusbaum continues:

Very little equity exposure will be a bad idea unless global stock markets are permanently broken which is not a bet I am willing to make.

I suspect he's right: global stock markets are huge and liquid, and it seems impetuous to tar them all with the same brush. Dialing down US equities in particular might make sense, but throwing all other equities into the trash along with them makes less sense.

Besides, the investment strategies that work for Harvard and Yale might not work nearly as well for anybody else. For one thing, "alternative investments" are notoriously expensive, with most hedge funds charging a 2-and-20 management fee. Harvard and Yale, by contrast, either invest on their own, or else, if they do invest in hedge funds, negotiate a much lower fee.

Gottex, of course, won't just pay full whack: it'll also charge investors its own fees on top. Ouch.

I've always wondered why Harvard and Yale don't offer their alumni an investment service. Park your money with us, and we'll pour it into the general endowment: we won't do anything different with your money than we'll do with our own. You can add money or take money out annually, but if you take money out we will first subtract a tax-deductible 2-and-20 fee. And any time you want to donate funds to the endowment, just check a box and we'll mark them as ours rather than yours.

There are probably very good legal reasons for not doing this. But it seems like a good way of adding substantially to the endowment to me. Investors generally hate hedge-fund fees; they might be quite attracted to an opportunity where all those fees go to their alma mater.

(Via Alloway)