Last summer in Boston, the Trustee Leadership Forum for Retirement Security held its annual meeting at Harvard’s Kennedy School. Trustees and representatives of various state pension funds listened to explanations about the challenges facing endowments and pension funds.

The conference is an attempt to explain why so many state pensions are underfunded and underperforming. The event was run by Jay Youngdahl, a senior fellow at the Hauser Center for Nonprofit Organizations at Harvard University. Youngdahl is the author of “Investment Consultants and Institutional Corruption,” and as you might imagine, there was very little in the way of minced words at this event. I was invited to give a presentation to this group on how cognitive bias and performance-chasing leads to investing failures (you can see “The High Cost of Neuro-Financial Errors” here).

A large part of the impetus for this sort of conference is the solidifying consensus that what has become known as the Yale model — outsized investments in hedge funds, venture capital and private equity — no longer works. Indeed, the performance numbers for the past 10 years make it clear that this model has failed to live up to its promise for a while, perhaps because there just aren’t enough good alternative investments to go around. Note that none of this is cutting-edge theory or newly discovered knowledge. Rather, it is a result of institutional inertia, where even a failing approach to investing holds on to its adherents long past its sell-by date.

Continues here

Category: Hedge Funds, Investing, Venture Capital

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Underinvested in US Equities, Overinvested in Hedge Funds”

  1. VennData says:

    At the meeting they handed out some great swag like this t-shirt:

    I’m a trustee and all I left the endowment with is this stupid t-shirt

  2. Lyle says:

    I would agree that the herd effect has hurt the return on alternative investments. It seems because investing ideas don’t have intellectual property protection, that if someone has a good idea after a couple of years everyone does it. Then the inefficiency in the market that caused the good returns gets squashed away. More Money than God indeed would suggest that hedge funds have this problem, someone has a good idea of a strategy, but after a couple of years of good performance, enough folks that work there get better jobs, and the idea goes very wide. Then the inefficiency that was exploited gets squashed and the returns go down for all.

  3. Iamthe50percent says:

    Barry, judging by my own state of Illinois, the states benefit from not only lower taxes, but by kickbacks from politically connected hedge funds. Therefore the high fees are not a bug but a feature.

  4. VennData says:

    Norway’s Sovereign Wealth fund needs hire returns.

    “…The fund, which owns 1.3 percent of the world’s equities, has returned less than 4 percent on average since it started investing in the late 1990s. Norges Bank Governor Oeystein Olsen, who oversees the fund, … [said] It will also increase the number of employees to about 600 from 370 now, mostly outside Norway, including 200 for its real estate division, the fund said today…”

    Or you could dire the three hundred you have, and yourself, and do a simple equity/bond index and outperform your Sovereign Peers.

  5. rd says:

    I have always understand most of the alternative investments to be a form of Graham and Dodd value investing where illiquid assets off the beaten path of the exchanges would offer premiums for the early investors. The goal of Graham and Dodd investing is to identify the underpriced assets and the market inefficiencies BEFORE the crowd, so that you can sell them to the crowd when they arrive.

    It appears that university endowments and pension funds are now playing the role of mom-and-pop investor for the peaking illiquid alternative sector. It wouldn’t surprise me if the smart money like David Swenson at Yale or Jeremy Grantham of GMO have been selling many of his decade-ago alternative purchases to the professional marks as they show up looking for their advice.

  6. Iamthe50percent,

    don’t repeat: “…judging by my own state of Illinois, the states benefit from not only lower taxes, but by kickbacks from politically connected hedge funds. Therefore the high fees are not a bug but a feature…”

    “People” may begin to get curious, and start paying attention to ‘Affaires’ in their own neck o’ the woods..

    to your Point, the ‘Farming’(-out) of this Field, is, truly, a ‘Fruited Plain’ for “Wall St.”

    see also:

    • Iamthe50percent says:

      I work with a guy who was born in Chicago, like me, but worked for years at Bell Labs in New Jersey. He says it’s a tossup which state is more corrupt.

      Federal pensions are invested in Treasuries, directly from the Secretary of the Treasury. Our “401K”, the TSP,, has four basic index funds, managed with ultra-low fees. Hey, if you are managing Trillions you don’t need high fees to make a bundle. Politics and corruption aside, I don’t understand why the states don’t lobby Congress to let them participate.

  7. [...] the most prominent proponents of alternative investments have been Ivy League college endowments. Blogger Barry Ritholtz writes today of attending a conference of non-profit investors addressing this [...]

  8. Hoosier89 says:

    should have left Jack Meyer alone at Harvard. They are learning he and his crew may have been worth what they were paid.

  9. ch says:

    Having to be “short” stocks (the equivalent of being “long” currency) is a bad idea when political expediency requires the destruction of the currency against stocks.