Not a lawyer, but I doubt it's a case. Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities. They likely have a fair amount of investment in fixed income, which is always going to under-perform equities in the long run.

That said, ~5.5% below the market every year is a pretty shitty result, at least worth putting someone's feet to the fire over.

> Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities.

That does make some sense, but actually endowments typically invest quite a bit in in riskier asset classes. From https://caia.org/aiar/access/article-1160:

> The average US endowment fund held roughly 70 per cent in traditional asset classes (public and private equity, bonds and cash) with the remaining 30 per cent invested in alternative assets.

Alternative asset classes basically means "anything other than stocks and bonds", and includes stuff like derivitives, commodities, PE deals, venture capital, etc. And CU's investment in alternative asset classes is called out explicitly in the complaint.

So I don't read this as a complaint that CU is playing too safe, it's that they made too many risky bets, and lost.

I'm not sure that makes the law suit any more viable, but "the endowment gambled away my donation" is a much more sympathetic complaint than "the endowment sunk my donation into bonds instead of gambling it like I'd hoped"!

A 2014 Vanguard research paper:

> Two important observations emerge from the figure. First, large endowments have clearly generated strong excess returns, but the majority of their success occurred during the early and mid-2000s. Second, as small and medium endowments ramped up their allocations to alternative investments over the ten years through June 2013 and as more investor money has flowed into alternative categories such as hedge funds, positive excess returns have not been forthcoming. Unfortunately, small and medium endowments did not participate in the early success of alternative investments realized by their larger counterparts, and recently—after years of increasing their exposure to alternatives—they have trailed the return of the 60% stock/40% bond benchmark by larger gaps than at any point in the full 20-year period.

* https://www.vanguardcanada.ca/documents/assessing-endowment-...

There seems to have been a few 'golden years' for alternative assets at the time of publication.

Curious to know how the years 2014-2020 have treated them. A more recent 2018 study:

> Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

The alternative assets are less risky, because they have less market exposure, and when uncorrelated (or less correlated) return streams are mixed together, the volatility of the portfolio is reduced.

It's very common that a shitty investment with high volatility and low returns can actually improve the risk adjusted returns of a portfolio. Like gold, for example.

Also, hedge funds are significantly less risky than holding the S&P 500, since most funds have less than 100% net long exposure. And market neutral funds have 0% net long exposure.

> The alternative assets are less risky, because they have less market exposure

If you're including PE in there, you are way off base. According to the assumptions in BlackRock's Aladin platform, global buyout has an equity beta of something like 1.6.

I mean, that's just one, old, moderate sized fund. I couldn't tell what PE's total beta exposure is, but I would unsurprised if the variance between different funds is very, very, large.

Moreover, beta doesn't capture the whole picture. By any chance do you know what the funds correlation to the broader equity market is?

That is their assumption for global buyout as an asset class. You can grab their allocation assumptions at [1]. There is a "Download data" button on the page with the assumptions for a variety of base currencies.

You can also back out a ballpark beta from the MM theorems and what we know about company leverage post LBO. See [2] foot note 6.

[1] https://blackrock.com/institutions/en-us/insights/charts/cap...

[2] https://www.aqr.com/Insights/Research/White-Papers/Demystify...

Thanks, I thought you were talking about the global buyout fund. Will check it out. AQR and Blackrock do really great stuff

That's what the marketing department says. The actual returns paint a rather different picture.

We don't know what is their risk profile.

The goal should never be to beat the market, but to beat the market relative to risk exposure.

I don’t doubt though that a lot of money is wasted on fees and salaries can be preserved via passive investing.

Attempting to bring the suit is likely itself just a smear tactic, to apply pressure to fire someone.

He is a former chairman of the fund, so it's definitely meant as a slight. https://businessden.com/2020/07/19/former-chairman-donor-sue...

Picking the previous decade in a market that has mostly simply gone up is hardly cherry picking. The problem with choosing simple funds such as the plaintiff's example of the Vanguard S&P 500 Index Fund is that selection of such leaves little room to offer political benefits to "being on the endowment committee". The rebuttal by the current endowment board that they have too much money to risk it in one asset class is trivially overcome by a grossly simple percentage of bond allocation - but such simple investment approaches don't keep dozens of active managers engaged.

It isn't possible for bond markets to collapse at the same time as stocks?

It happened during Coronavirus, but historically bonds have been counter cyclical. Some are worried that the paradigm has changed, and that bonds are no longer uncorrelated.

If this is true, it has large and significant ramifications on optimal portfolio construction.

> Some are worried that the paradigm has changed, and that bonds are no longer uncorrelated."

I argue that this is what has changed:

"Treasuries have also benefitted from the wider adoption of non-cash collateral since the crisis. Just over $1.8 trillion in cash was posted as collateral against loans and other transactions in 2008, with $1.3 trillion coming in the form of securities and other instruments, according to data provider IHS Markit. A decade later, those positions have inverted, with non-cash collateral balances standing at $1.6 trillion, compared with $870 billion for cash."[0]

and

“If an institution wishes to use [Treasury] assets for financing, to gain yield through lending them out or to meet their HQLA requirements, putting the securities into triparty is the most efficient way to achieve those goals”[0]

Since treasuries (and bonds in general through collateral transformation, emphisis on "non-cash collateral" above meaning not just treasuries) are being used to finance more risk asset purchases.

[0] https://www.bnymellon.com/us/en/what-we-do/markets/aerial-vi...

> It happened during Coronavirus

I don't know about that:

> The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%.

* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...

Though the article goes on to say the primary reason for owns bonds are:

* Bonds hedge stock market volatility.

* Bonds can be used to rebalance.

* Bonds can be used for spending purposes.

* Bonds protect against deflation.

See also his 2018 Q4 article (when the S&P 500 was in the middle of its 20% correction):

* https://awealthofcommonsense.com/2018/10/the-case-for-bonds/

If you're comparing relative returns, you need an accurate benchmark. Otherwise it's comparing apples to oranges.

Would you compare returns of a cash portfolio against the S&P500? That would be ridiculous.

I don't know the weights of this portfolio, however the article states "CU’s diversified portfolio" so I'd imagine it's more than the S&P.

> abysmal investment performance, which could have been significantly improved by simply investing in broad market U.S. equity index funds and not being over weighted in actively managed investment and ‘alternative investments,’

Everything's easier in hindsight.

This is not a question of the investment managers, but of the board of trustees of the fund. The investment managers simply execute the board's wishes, hopefully with some useful back-and-forth on how best set and do this. How the investment managers can be assessed against the goal set to them by the board. How wise the board's strategy is, is a separate question.

This seems more a request of the board to only invest in the S&P500, and to do so passively. For a large fund, in my opinion, this is folly - and this is without going into an active/passive discussion: Over the long term larger companies simply don't survive all that well. Growth and change comes from newer or reborn companies, see: FAANG, and this is equally true outside of internet companies. To stay passive in the S&P ignoring smaller companies seems short-sighted, and a university endowment should look longer, decades out.

Looking longer comes to investment strategy, which is essentially at a minimum matching future liabilities against assets. For this I'd suggest a composite of Russell 3000 instead of S&P500, an MSCI Global Index (this is complex - Anglo markets have a high level of market capitalisation vs. GDP, but in non-Anglo markets, take Germany, China) funds are mainly not raised via equity, and listed companies have a huge skew not representing the economy... or even something radically different. Something including forests at least.

I could go on but feel this could turn into a ramble. The above should be enough.