Investment Beliefs of Endowments
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Columbia Business School - Finance and Economics
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
September 16, 2013
Columbia Business School Research Paper No. 13-72
U.S. 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. The perceived alpha for private equity is much higher than the historical performance of this asset class, but the opposite is true for the perceived hedge fund alpha. These out-performance beliefs have increased over time. Private universities tend to be less risk averse and have more optimistic beliefs. Universities with larger endowments, higher spending rates, and those that rely more on the endowment to meet operational budgets tend to believe that alternatives deliver higher alphas. Taking into account the implied equity exposures in alternative asset positions, the effective equity holding of endowments is approximately 60%.
Number of Pages in PDF File: 47
Keywords: Hedge funds, private equity, alternative assets, portfolio choice
JEL Classification: G11, G14, G23working papers series
Date posted: September 19, 2013
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