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Alternative Market Briefing

Study shows endowments generate zero alpha, except from alternative investments

Wednesday, October 23, 2013

Matthias Knab, Opalesque:

A recent paper entitled Do (Some) University Endowments Earn Alpha? by academics Brad M. Barber from the University of California and Guojun Wang, a PhD student in the Department of Economics at the University of California asked do educational endowments earn superior returns?

The academics looked at the strong returns earned by some legendary endowments, such as Yale University under the management of David Swensen, which have led to the widespread adoption of the so-called endowment model of investing. Using NACUBO/Commonfund data from 1991 to 2011, they analysed the returns earned by U.S. educational endowments using simple style attribution models.

The authors first documented the returns on the average endowment match the returns of a 60% U.S. stock (S&P 500 Index) and 40% U.S. bond portfolio (Barclays Capital U.S. Aggregate Bond Index). When they restricted the attribution model to public stock (U.S. and international stock) and bond (U.S. bond) benchmarks, the average endowment earned an alpha close to zero, the public stock/bond benchmarks explained 99% of the time-series variation in the return of the average endowment, and the attribution model yielded sensible estimates of the typical stock and bond allocations (roughly 60% stock and 40% bonds).

They then focused on the returns earned by institutions, such as Ivy League and top-SAT schools, and top......................

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