Many endowments have cut back their exposure to hedge funds, while increasing attention to private equity, reported a Bloomberg article, which notes the private equity asset class has a similar high cost structure, illiquidity and returns.
Overall, earlier return estimates of 8.7 percent for the Ivy League endowments proved to be too optimistic.
Harvard’s endowment gained 6.5 percent for the fiscal year ended June 30, while Yale had an increase of just 5.7 percent; the University of Pennsylvania endowment gained 6.5 percent; Dartmouth yielded 7.5 percent; Brown, the smallest of the Ivy endowments at $4 billion, was a performance outlier at 12.4 percent. (Princeton, Cornell and Columbia have yet to report.) Other notable endowment returns include Massachusetts Institute of Technology at 8.8 percent, Stanford at 6.5 percent and Duke at 6.9 percent.
The biggest contributors to the weak performance of endowments were high exposure to hedge funds (2019 returns = 1.1 percent) and natural resources (2019 returns = –6.8 percent), while many endowments’ high operating costs also acted as a drag on returns.
Reported in the article, Daniel Rasmussen, formerly of Bain Capital, now founding partner of Verdad Advisers, said investors in private equity are much too optimistic: “94 percent of institutional investors expect private equity to outperform public markets; 23 percent expect private equity to outperform by 4 percent per year or more. This is an astonishing degree of consensus from the most sophisticated investors in the world. Great mispricings require highly correlated beliefs on the part of investors, and what we have today in private equity is the greatest of consensuses … But what’s even more frightening than the degree of consensus about returns is the lack of understanding of the risks.”
