I stumbled across this a few days ago, maybe the hat tip should go to Charles Kirk but I am not sure, about a new fund of some sort that will "emulate the investment principles of U.S. 'super endowments' " which includes Harvard and Yale.The company bringing this is a fund of funds company called Gottex Fund Management based in Switzerland but with offices in the US.
There was a press release on the Gottex site that says the fund was launched last week. The product will target 60-65% for alternative assets because the team running the fund "determined that a 65% exposure to alternative investments combined with traditional investments did the best in the long term."
I was not able to glean how the fund will emulate what Harvard, Yale or anyone else is doing. There was no indication that they would be privy to what any of the "super endowments" are doing. That is not to say that these people don't know what they are doing, the result may be just as good or better, I'm just saying that part is not spelled out.
It appears this will not be a listed product as it is coming from a fund of funds shop but the idea is very interesting. I don't know how many posts and articles I have written over the years about investing, or not, along these lines. The notion of building your own endowment fund has become progressively easier to do (not to say it is right for everyone just saying it is more accessible) in the last couple of years.
One thing that stuck out from the article was their determination that 60-65% is the right mix for alternative assets. As I have mentioned many times on this site the US stock market is getting close to ten years with no gains. Ten years is a long time. This decade long round trip to nowhere we are in is going to skew a lot studies in the future about how to allocate your assets. The process undertaken by Gottex was not disclosed so I have no idea whether their research has a skew or not but there will be future studies done on this that will skew because of the poor equity returns of late.
This future research will argue for very little equity exposure. Very little equity exposure will be a bad idea unless global stock markets are permanently broken which is not a bet I am willing to make.
No word if one of the endowments emulated will be from the University of Hawaii-Hilo, pictured above. Come to think of it I don't know if UHH even has endowment fund:-)
On a related note I believe the 2008 results from Harvard and Yale will be out soon. I will write about them whenever they report.
8 comments:
Hi, Roger. The devil is in the details here, and much is omitted. I have two major difficulties with such an idea:
1) Many alternative asset classes are saturated, and their best days are behind them for now, until we get a shakeout -- there is a lot of crowd following here, and perhaps appraisal bias as well. So the 60-65% looks great on a backtest, but looking through the windshield, there are reasons for concern.
I got the same feeling listening to the manager of the Kresge endowment this week... he won't invest in bonds any more, because they always yield less than alternative investments, if you do it right. I worry about the over-investment in alternatives, and the increase in structural complexity and illiquidity. But he runs and endowment, so maybe he can ride out any storm.
2) Beyond that, there is no commentary on the liability structure of this fund. I doubt that investors can come and go as they please, but this fund is likely going to try to be more liquid than the way that endowments operate. Endowments truly can buy and hold, because they only scrape 4-6% of the assets each year. They don't have to worry about illiquidity, appraisal bias, etc.
But what if there is a large demand for liquidity, particularly when a/some major illiquid asset class(es) is/are out of favor? There is the potential for a run on the fund... something endowments don't face.
Many large failures in investment companies come from a failure to analyze risk-based liquidity -- the assets are illiquid, and the liabilities are liquid. I wonder if the Gottex fund, and other similar entities aren't setting themselves up for trouble.
Further to David M's comment, it is worthwhile revisiting Richard Bookstaber's "Demon of Our Own Design", in which he argues (successfully, IMHO) that the failure to monitor and design for liquidity demand (and the inability to satisfy same) can be seen as an underlying cause of many/most/all of the derivatively based investment product fiascos of the past 2-3 decades.
R in NY
PS... Still looking for that source of correlation data, and in particular, sectors/stocks with a low correlation to any of Financials/Energy/Commodities... Tx
Since it is a hedge fund product I would not expect too mcuh detail to be available on the web site. its just an interesting concept is all.
I, for one would like to keep abreast of a Jessica Simpson, Dolly Parton and Carmen Electra endowment fund.
No hidden asset classes here.
T
definitely an interesting concept. will be following this with interest. but, im sure specific info will be hard to come by
seems to me that alternative asset class is supposed to zig when market zags and visa versa. what I see happening is that the alternatives go down much more when market is up than go up when market is down. Is that a normal result?
Our studies, over more than a decade, clearly show mutual fund past performance is capable of consistently beating the market, as measured by Standard & Poor's 500 Stock Index.
However, a lack of industry receptivity to proven but unorthodox ideas constitutes a barrier to the returns of the S&P 500.
Why is breaking the S&P 500 sound barrier so important anyway?
The adoption of our ISP industry-wide would enable the endowment fund investor to boost their annual return to the "gold standard" returns of Yale,Harvard and Princeton.
Should there be any return disparity?
The main reason is that since a total fund population contains on the average 3-4 times as many "mediocre" as "superior" performing funds, there is a 3-4 times greater probability of selecting more "mediocre" than "superior " funds.
The use if our ISP method is a proven way to cure this situation by objectively removing "mediocre" funds from the total population.
Applying the ISP method to 3-4 trillion USD of superior performing funds (1/2 the open - end, fund market)university endowmemts could comfortably reach the "gold standard".
At Regen Associates, we routinely predict fund outcomes by employing a combination of unique steps - using mathematics and logic differently. These steps are designed to identify and then discard "mediocre" performing (funds that do not beat the S&P 500) from a population. The remaining funds, therefore, are designated as "superior " performing (funds that beat the S&P 500).
Our findings are supported by a .96 Pearson Correlation between our ISP and the S&P 500 - using tens of millions of data cells over more than a decade.
Thus, a method of reliably predicting and ranking "superior " performing funds relative to the S&P 500, once a distant dream, is now a reality.
At Regen Associates, we have developed an effective Investment Selection Paradigm (ISP) that successfully overcomes the challenges of data overload, noise, bias and the naysayer with a uniquely bold and accurate analytic method.
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Unquestionably Mutual Funds are a great investment vehicle but like any investment they are a double edge sword. They are more predictable than stocks but can produce weak or no results if not understood.
Currently, there are over 13,000 funds to choose from so choice can be bewildering - under the present non-system. Producing an acceptable return is more bewildering - under the present non-system. For decades, the average return on managed funds - funds whose fortunes are guided by a portfolio manager - was an annual GROSS Return of 9-10% with a positive NET return ( after Fees, Expenses, Taxes, and Inflation ) of 1- 2%. This means very simply your funds will take all of your earning years to double your principal - on an after FETI basis – a fact that is not very well publicized for obvious reasons.
You have a second choice. Invest in unmanaged or index funds which run mostly on auto - pilot with no portfolio manager and a better FETI expected return of
4-5 %. While more acceptable, it would still require about 15-18 years to double your funds. Most people don’t have too many 15-18 year periods left in their earning years. This method has been gaining more favor - especially in this declining market when investors are desperate not lose anymore asset value with no guarntees. This is a good, conservative choice if you already have a 7 or 8 figure asset base to start with but not if you are trying to build one from scratch.
You have a third choice. You can invest in Superior Performing Funds (SPF) – (funds that beat the S&P 500) with an expected (FETI) return of 8- 9% - requiring about 8-9 years to double. All the experts say this cannot be done but they are dead wrong. Just remember their wrong- headed advice proclaimed in the fall of 2007 about the strength of the economy.
This method of fund investing is superior to both managed and unmanaged funds. However, the choice of SPF requires a system of data analysis to replace the current non-system. This system is designed to find SPF that are buried under an avalanche of Mediocre Performing Funds (MPF) - funds that do not beat the S&P 500. Without a system and a data prism/lens it is incredibly difficult. With the Investment Selection Paradigm (ISP) it is incredibly easy to do.
In any market, the ISP finds thousands of S&P 500 beating funds each and every month from which to choose. In the present market environment, SPF will replace a heavily negative S&P 500 result with a lighter negative one which is not an acceptable goal. So it is more advisable to wait until the market begins to recover. The catch is that right now nobody knows - with any degree of certainty when that will be.
In November, 2007, the ISP Monthly Report indicated there weren’t any “good” fund candidates from which to choose. As a result, all investments under our control were redeemed and moved into cash where they presently remain. Since then, the market has declined more than 70% - and still quite soft.
Because of this, ISP investments remain in CASH. As a safety precaution - each month an ISP Investment Selection Report is prepared to find out if there are enough “good” candidates with a 95% chance of producing a positive net FETI return. When that will happen again is anyone’s guess and can’t be predicted in advance with any degree of certainty only after the event – looking backward in time. The shorter the period of time between the actual event and its recognition the better the results. Since the Monthly ISP Report predicted the start of this decline in 11/2007 within 30 days of the event in 10/2007 – there is a good likelihood it will indicate the beginning of the next market rally within a “30 day window”.
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