February 24, 2018
That is the implication of an NYT article reporting on the fact that the returns on university endowments trailed a simple index mix of either 60 percent stock and 40 percent bonds or 70 percent stock and 30 percent bonds. According to the article, university endowments had an average nominal return over the last decade of 4.6 percent. This compares to a return of 5.3 percent for a 60–40 stock/bond index mix and 5.4 percent for a 70–30 stock/bond index fund.
This means that universities were throwing billions of dollars in the toilet in order to invest with hedge funds and private equity funds rather than going with a simple index. It is worth noting that the managers of these funds routinely earn salaries of millions of dollars a year. Paychecks in the tens of millions and even hundreds of millions are not uncommon.
It will be interesting to see if universities will continue with an investment strategy that has the effect of losing them money while making a tiny group of people incredibly rich, especially in a context where so many have refused demands to divest holdings in fossil fuel corporations, claiming the need to maximize returns. This article implies there is less concern about maximizing returns when it comes to investing with hedge funds and private equity.
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