Abstract

http://ssrn.com/abstract=1568446
 


 



Do Endowment Funds Select the Optimal Mix of Active and Passive Risks?


Keith C. Brown


University of Texas at Austin - Department of Finance

Cristian Ioan Tiu


SUNY at Buffalo; University of Texas at Austin - Department of Finance

March 10, 2010

Journal of Investment Management (JOIM), First Quarter 2010

Abstract:     
The investment decision confronting managers of multi-asset class portfolios can be characterized in terms of the passive (i.e., benchmark or policy) and active (i.e., market timing and security selection) strategies they adopt. In this paper, we investigate whether managers select the appropriate combination of active and passive allocations in their portfolios. Noting that this issue is ultimately a risk management question, we adapt a simple framework for establishing what constitutes the optimal level of active and passive risk exposures.We then examine the question empirically using a database consisting of the allocation decisions and investment performance of a large set of university endowment funds over the period from 1989 to 2005. Our findings show that (i) the average endowment had too little active risk exposure in its portfolio, (ii) endowment funds could have significantly increased their risk-adjusted performance by enhancing the scale of the alpha-generating strategies they were already employing, and (iii) this tendency to under-utilize active management skills was more pronounced for larger endowments than for smaller ones. We conclude that the typical endowment fund could have improved its performance by increasing the commitment to its active management skills.

Keywords: Risk budgeting, active-passive allocations, investment performance, endowment funds

JEL Classification: G00

Accepted Paper Series





Not Available For Download

Date posted: March 13, 2010 ; Last revised: June 3, 2010

Suggested Citation

Brown, Keith C. and Tiu, Cristian Ioan, Do Endowment Funds Select the Optimal Mix of Active and Passive Risks? (March 10, 2010). Journal of Investment Management (JOIM), First Quarter 2010. Available at SSRN: http://ssrn.com/abstract=1568446

Contact Information

Keith C. Brown (Contact Author)
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)
Cristian Ioan Tiu
SUNY at Buffalo
Jacobs Management Center
Buffalo, NY 14222
United States
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-225-1636 (Phone)
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