IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v24y2018i1p3-33.html
   My bibliography  Save this article

Investment beliefs of endowments

Author

Listed:
  • Andrew Ang
  • Andrés Ayala
  • William N. Goetzmann

Abstract

United States university and college endowments now hold close to one†third of their portfolios in private equity and hedge funds. We estimate the implied beliefs of endowments on these alternative assets’ returns relative to equities and bonds. At the end of 2012, the typical endowment believes that its private equity investments will outperform a portfolio of conventional assets by 3.9% per year, and hedge funds will outperform by 0.7% per year. Taking into account the implied equity exposures in alternative asset positions, the effective equity holding of endowments is approximately 60%.

Suggested Citation

  • Andrew Ang & Andrés Ayala & William N. Goetzmann, 2018. "Investment beliefs of endowments," European Financial Management, European Financial Management Association, vol. 24(1), pages 3-33, January.
    • Handle: RePEc:bla:eufman:v:24:y:2018:i:1:p:3-33
    DOI: 10.1111/eufm.12149
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/eufm.12149
    Download Restriction: no
    File URL: https://libkey.io/10.1111/eufm.12149?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Sensoy, Berk A. & Wang, Yingdi & Weisbach, Michael S., 2014. "Limited partner performance and the maturing of the private equity industry," Journal of Financial Economics, Elsevier, vol. 112(3), pages 320-343.
    2. Robert S. Harris & Tim Jenkinson & Steven N. Kaplan, 2014. "Private Equity Performance: What Do We Know?," Journal of Finance, American Finance Association, vol. 69(5), pages 1851-1882, October.
    3. Adam L. Aiken & Christopher P. Clifford & Jesse Ellis, 2013. "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases," The Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 208-243.
    4. Ravi Jagannathan & Alexey Malakhov & Dmitry Novikov, 2010. "Do Hot Hands Exist among Hedge Fund Managers? An Empirical Evaluation," Journal of Finance, American Finance Association, vol. 65(1), pages 217-255, February.
    5. Franklin R. Edwards & Mustafa Onur Caglayan, 2001. "Hedge Fund Performance and Manager Skill," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(11), pages 1003-1028, November.
    6. Jeffrey R. Brown & Stephen G. Dimmock & Jun-Koo Kang & Scott J. Weisbenner, 2014. "How University Endowments Respond to Financial Market Shocks: Evidence and Implications," American Economic Review, American Economic Association, vol. 104(3), pages 931-962, March.
    7. Thomas Gilbert & Christopher Hrdlicka, 2015. "Why Are University Endowments Large and Risky?," The Review of Financial Studies, Society for Financial Studies, vol. 28(9), pages 2643-2686.
    8. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1747-1776, April.
    9. Keith C. Brown & Cristian Ioan Tiu, 2013. "The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds," NBER Chapters, in: How the Financial Crisis and Great Recession Affected Higher Education, pages 43-98, National Bureau of Economic Research, Inc.
    10. Doron Avramov & Guofu Zhou, 2010. "Bayesian Portfolio Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 25-47, December.
    11. Green, Richard C & Hollifield, Burton, 1992. "When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    12. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
    13. Ulrike Malmendier & Stefan Nagel, 2016. "Learning from Inflation Experiences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(1), pages 53-87.
    14. Josh Lerner & Antoinette Schoar & Jialan Wang, 2008. "Secrets of the Academy: The Drivers of University Endowment Success," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 207-222, Summer.
    15. Michael Ewens & Charles M. Jones & Matthew Rhodes-Kropf, 2013. "The Price of Diversifiable Risk in Venture Capital and Private Equity," The Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1854-1889.
    16. William N. Goetzmann & Sharon Oster, 2013. "Competition among University Endowments," NBER Chapters, in: How the Financial Crisis and Great Recession Affected Higher Education, pages 99-126, National Bureau of Economic Research, Inc.
    17. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
    18. Capocci, Daniel & Hubner, Georges, 2004. "Analysis of hedge fund performance," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 55-89, January.
    19. Dichev, Ilia D. & Yu, Gwen, 2011. "Higher risk, lower returns: What hedge fund investors really earn," Journal of Financial Economics, Elsevier, vol. 100(2), pages 248-263, May.
    20. John M. Griffin & Jin Xu, 2009. "How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2331-2370, July.
    21. Stephen J. Brown & William N. Goetzmann & Roger G. Ibbotson, 1997. "Offshore Hedge Funds: Survival and Performance 1989-1995," NBER Working Papers 5909, National Bureau of Economic Research, Inc.
    22. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, August.
    23. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, June.
    24. Brown, Keith C. & Garlappi, Lorenzo & Tiu, Cristian, 2010. "Asset allocation and portfolio performance: Evidence from university endowment funds," Journal of Financial Markets, Elsevier, vol. 13(2), pages 268-294, May.
    25. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
    26. Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2007. "Do hedge funds deliver alpha? A Bayesian and bootstrap analysis," Journal of Financial Economics, Elsevier, vol. 84(1), pages 229-264, April.
    27. Avramov, Doron & Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2011. "Hedge funds, managerial skill, and macroeconomic variables," Journal of Financial Economics, Elsevier, vol. 99(3), pages 672-692, March.
    28. Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007. "Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle," Journal of Finance, American Finance Association, vol. 62(2), pages 731-764, April.
    29. Andrew Ang & Morten Sorensen, 2012. "Risks, Returns, and Optimal Holdings of Private Equity: A Survey of Existing Approaches," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-27.
    30. Francesco Franzoni & Eric Nowak & Ludovic Phalippou, 2012. "Private Equity Performance and Liquidity Risk," Journal of Finance, American Finance Association, vol. 67(6), pages 2341-2373, December.
    31. William Fung & David A. Hsieh & Narayan Y. Naik & Tarun Ramadorai, 2008. "Hedge Funds: Performance, Risk, and Capital Formation," Journal of Finance, American Finance Association, vol. 63(4), pages 1777-1803, August.
    32. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    33. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," The Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    34. Keith Brown & Cristian Tiu, 2013. "The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds," NBER Working Papers 19517, National Bureau of Economic Research, Inc.
    35. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 373-416.
    36. Juhani T. Linnainmaa, 2013. "Reverse Survivorship Bias," Journal of Finance, American Finance Association, vol. 68(3), pages 789-813, June.
    37. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 291-307, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen G. Dimmock & Neng Wang & Jinqiang Yang, 2019. "The Endowment Model and Modern Portfolio Theory," NBER Working Papers 25559, National Bureau of Economic Research, Inc.
    2. Aleksandar Andonov & Joshua D Rauh, 2022. "The Return Expectations of Public Pension Funds," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3777-3822.
    3. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2020. "Flights to Safety," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 689-746.
    4. Joseph Gerakos & Juhani T. Linnainmaa & Adair Morse, 2021. "Asset Managers: Institutional Performance and Factor Exposures," Journal of Finance, American Finance Association, vol. 76(4), pages 2035-2075, August.
    5. Christopher Avery & Ronald G. Ehrenberg & Catharine Hill & Douglas A. Webber, 2024. "Endowment Spending Rules," NBER Chapters, in: Financing Institutions of Higher Education, National Bureau of Economic Research, Inc.
    6. Matteo Binfarè & Gregory Brown & Robert Harris & Christian Lundblad, 2023. "How Does Human Capital Affect Investing? Evidence from University Endowments," Review of Finance, European Finance Association, vol. 27(1), pages 143-188.
    7. Cejnek, Georg & Franz, Richard & Stoughton, Neal M., 2023. "Portfolio Choice with Endogenous Donations - Modeling University Endowments," Journal of Economics and Business, Elsevier, vol. 125.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benoît Dewaele, 2013. "Portfolio Optimization for Hedge Funds through Time-Varying Coefficients," Working Papers CEB 13-032, ULB -- Universite Libre de Bruxelles.
    2. Andrew W. Lo & Mila Getmansky & Peter A. Lee, 2015. "Hedge Funds: A Dynamic Industry in Transition," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 483-577, December.
    3. Benoît Dewaele, 2013. "Leverage and Alpha: The Case of Funds of Hedge Funds," Working Papers CEB 13-033, ULB -- Universite Libre de Bruxelles.
    4. Uppal, Raman & Vilkov, Grigory & Buss, Adrian, 2015. "Where Experience Matters: Asset Allocation and Asset Pricing with Opaque and Illiquid Assets," CEPR Discussion Papers 10437, C.E.P.R. Discussion Papers.
    5. Yang, Fan & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2022. "Hedge Fund Performance: A Quantitative Survey," EconStor Preprints 260612, ZBW - Leibniz Information Centre for Economics.
    6. Korteweg, Arthur & Sorensen, Morten, 2017. "Skill and luck in private equity performance," Journal of Financial Economics, Elsevier, vol. 124(3), pages 535-562.
    7. Sofia Johan & Minjie Zhang, 2021. "Information Asymmetries in Private Equity: Reporting Frequency, Endowments, and Governance," Journal of Business Ethics, Springer, vol. 174(1), pages 199-220, November.
    8. Vikas Agarwal & Vyacheslav Fos & Wei Jiang, 2013. "Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings," Management Science, INFORMS, vol. 59(6), pages 1271-1289, June.
    9. Ling, Yun & Satchell, Stephen & Yao, Juan, 2023. "Decreasing returns to scale and skill in hedge funds," Journal of Banking & Finance, Elsevier, vol. 156(C).
    10. Robinson, David T. & Sensoy, Berk A., 2016. "Cyclicality, performance measurement, and cash flow liquidity in private equity," Journal of Financial Economics, Elsevier, vol. 122(3), pages 521-543.
    11. Wilkens, Marco & Yao, Juan & Jeyasreedharan, Nagaratnam & Oehler, Patrick, 2013. "Measuring the performance of hedge funds using two-stage peer group benchmarks," Working Papers 2013-18, University of Tasmania, Tasmanian School of Business and Economics, revised 01 Jun 2013.
    12. Cui, Wei & Yao, Juan, 2020. "Funds of hedge funds: Are they really the high society for little guys?," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 346-361.
    13. Yang, Fan & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2024. "Where Have All the Alphas Gone? A Meta-Analysis of Hedge Fund Performance," EconStor Preprints 289497, ZBW - Leibniz Information Centre for Economics.
    14. Arthur Korteweg & Stefan Nagel, 2016. "Risk‐Adjusting the Returns to Venture Capital," Journal of Finance, American Finance Association, vol. 71(3), pages 1437-1470, June.
    15. Michael S. O’Doherty & N. E. Savin & Ashish Tiwari, 2016. "Evaluating Hedge Funds with Pooled Benchmarks," Management Science, INFORMS, vol. 62(1), pages 69-89, January.
    16. Joenväärä, Juha & Kauppila, Mikko & Kahra, Hannu, 2021. "Hedge fund portfolio selection with fund characteristics," Journal of Banking & Finance, Elsevier, vol. 132(C).
    17. Uppal, Raman & Buss, Adrian & Vilkov, Grigory, 2017. "Financial Innovation and Asset Prices," CEPR Discussion Papers 12416, C.E.P.R. Discussion Papers.
    18. Martin Eling, 2009. "Does Hedge Fund Performance Persist? Overview and New Empirical Evidence," European Financial Management, European Financial Management Association, vol. 15(2), pages 362-401, March.
    19. Panopoulou, Ekaterini & Vrontos, Spyridon, 2015. "Hedge fund return predictability; To combine forecasts or combine information?," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 103-122.
    20. Agarwal, Vikas & Green, Tracy Clifton & Ren, Honglin, 2017. "Alpha or beta in the eye of the beholder: What drives hedge fund flows?," CFR Working Papers 15-08, University of Cologne, Centre for Financial Research (CFR), revised 2017.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:24:y:2018:i:1:p:3-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.