Hedge Funds for Yale, but Not for Everybody

NEW YORK (HedgeWorld.com)–Yale University’s hedge fund investments returned 18% for the past fiscal year. Other alternatives did even better for the school.

The overall portfolio made more than 22% in the fiscal year ending June 30, 2005. But institutions or individuals aspiring to follow the US$15 billion endowment’s example have been forewarned by Yale investment chief David Swensen.

Replicating his approach would require not only high-end expertise but also willingness to rebalance every day and stay with some very illiquid assets.

The portfolio has target allocations of 25% to absolute returns, 25% to real assets like natural resources, and 17% to private equity, with the remainder in traditional stock and bond investments.

Yale’s success certainly attracts attention. A client of First Atlas Capital, a London-headquartered US$5 billion alternative investment business, recently asked just how does Yale make higher returns.

Oscar Gil, senior associate at First Atlas Capital, points to the endowment’s long time horizon, its risk profile, and asset size as factors in the extraordinary performance.

Mr. Swensen highlighted the key question at a National Association of College and University Business Officers’ forum. If you can find the right managers that pursue the right strategies, then you can succeed in active investing, he told an audience of investment professionals.

He presented data and studies to show that individuals in general can’t do that, a point he also made in his recent book, Unconventional Success : A Fundamental Approach to Personal Investment. Moreover, it looks like many institutions don’t have the capacity to make what Mr. Swensen calls high-quality active investment decisions.

He emphasized that picking hedge fund managers is a very tough business and that a small organization without the dedicated full-time staff doesn’t have the ability to make the right choices.