A white paper published this month by the Commonfund Institute concludes that buyout funds, venture funds, hedge funds and other pools of alternative investments have “in general, contributed significantly” to performance for endowments and foundations over the last 20 years, either by boosting returns or smoothing volatility.
And the institute sees more of the same in the years ahead, while also cautioning that alternatives only makes sense for investors who have access to “top-tier” fund managers, given the great distance between top-quartile and bottom-quartile returns. According to the paper: “…the fundamental principles that have contributed in the past to higher investment returns among alternative investment strategies…remain largely unchanged as we look to the future.”
The January 2014 white paper, “Alternatives Reality: What to Expect From Future Allocations,” was written by Verne O. Sedlacek, president and CEO of Commonfund, an asset manager with $25 billion under management and a clientèle heavy with endowments and foundations. The Commonfund Institute is its education, research and training arm.
University endowments in particular have a lot riding on the question of how well alternative investments perform. The latest NACUBO-Commonfund Study of Endowments, presenting data as of June 30 2012, found that alternative investments account for more than half of their assets under management. Central to the “endowment model” many of them adhere to is that “long term asset pools…can outperform investors with shorter term time horizons by providing capital to less efficient, more complicated, and illiquid sectors of the capital markets,” wrote Sedlacek
That is the theory, but do investors really enjoy a so-called illiquidity premium in an area like leveraged buyouts? The answer is yes, according to Sedlacek. He points to a recent academic paper, “Private Equity Performance: What Do We Know?”, as well as data from the NACUBO-Commonfund study showing buyout funds outperformed the S&P 500 by just over 3 percentage points per year over the 10 years ended June 30, 2012—8.4 percent vs. 5.3 percent using time-weighted returns.
Look for the Commonfund Institute to publish a similar paper on real asset strategies in the months ahead.