University Endowments in Seven Questions
EXECUTIVE SUMMARY
- To a large extent, universities resemble alternative money managers: Shared characteristics include high asset volatility, leverage and exposure to liquidity risk.
- As a rule of thumb, university endowments can think about their risky allocations as the ratio of a risk premium divided by the variance of risky returns (adjusted by risk aversion).
- Non-endowment assets and liabilities are not adequately reflected in portfolio construction. Asset allocation can be materially different when the non-endowment balance sheet is factored in.
- Endowments may want to consider capital-efficient ways of combining active fixed income management with passive equity management.
- The optimal share of illiquid assets depends mostly on the liquidity risk premium and liquidity needs over a medium-term horizon.
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