Yale University and other large endowments made dramatic gains from the early 1990s through the late 2000s, setting the precedent for the so-called endowment investment model. The gains came mainly from adding alternative investments (e.g. private equity, hedge funds and real estate) to their portfolios. Public pension funds began to embrace the endowment model in earnest about 20 years ago. At the heart of the endowment model is a multi-asset framework for diversification. It is based on the theory that returns from “uncorrelated” asset classes will improve risk-adjusted performance through more effective diversification than could be achieved through stocks and bonds alone. Alternative investments, or alternative, have taken a predominant place among asset classes. For large endowments, the alts allocation is now 60% of total assets. The figure for public pension funds exceeds 30%. As the number of asset classes grew, so did the number of actively managed investment portfolios. Large endowments use on average more than 100 active managers. Large public pension funds use on average more than 150 active managers. This is the look of public funds that invest today: many asset classes, 30% or more of assets in alts and dozens of active managers.

The gains from the endowment model dried up during the 2008 global financial crisis. Why? Alternative investment markets began to change dramatically in the 1990s. The impetus then was the flood of money pouring into private markets and hedge funds. For example, between 1995 and 2018, the value of publicly traded real estate investment trusts in the United States increased 25-fold, from $ 50 billion to $ 1.25 trillion, as private market real estate investments ceded. the place to the public. The assets under management of hedge funds increased twenty-seven times between 1997 and 2018. Private equity assets under management increased thirty-seven times between 1994 and 2019. As a result, prices in the three markets became better aligned with public market prices. One indication of this is the high correlation between alternative securities and public stocks. The correlation coefficient between the aforementioned alts and US stocks is now on average almost 0.9, a very high number.


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