Abley cautions these late starters: “the average private equity fund fails to beat the listed market, and the average hedge fund will deliver something close to cash,” he says. The dearth of good managers with capacity is not the only challenge facing endowment wannabes. Trying to take maximum advantage of the demand they are witnessing, some alternatives managers have requested greater slices of outperformance, or have made it conditional to new clients that an investment in a desired strategy requires an allocation to a less attractive or less proven ‘side car’ fund.

Such sacrifices are not worth it, according to the chief investment officer of a multi-billion dollar Australian fund, who requests anonymity. He believes the endowment strategies are “yesterday’s model” since they are no longer supported by economic conditions. In a time of expensive debt, access-for-all to good private equity managers is not viable (and if you ask this CIO, private equity done badly can be painful – “it’s like amateur theatre”).

Many top-performing hedge funds are closed to new money, and the more systematic alternatives strategies are being replicated by alternative beta providers, so that some of “last year’s fantastic ideas are now tomorrow’s commoditised products”. The scholars behind Secrets agree that conditions in alternatives markets during the past 25 years have fueled the endowments’ strategies. Until 2000, aspiring entrepreneurs in robust markets made venture capital transactions attractive, and a steady supply of value opportunities and cheap debt prompted many private equity buyouts. Even so, the likes of Yale undoubtedly added a lot of value through manager selection, reflected in their consistently high returns.

Abley provides another possible explanation: that the endowments are freakishly lucky. The laws of probability demand that one investor from the institutional pool must outperform just like Yale has. “If there are 1,000 institutions, the odds are that one of them will outperform for 10 years on the trot,” Abley reasons. “Investment gurus are, therefore, routinely created on the back of a return stream that is an inevitable consequence of the number of people playing the game. It is important, then, to not be seduced purely by the numbers.”

Still, no matter what the true drivers of elite endowment returns have been, it is unknown whether they can maintain their leading positions in changing markets. But if strong relationships with skilful alternatives managers remain vital to their success, they might.

Ian Kennedy, director of research at Cambridge Associates, a consultancy to clients including Harvard, Yale, Stanford and the largest American university endowments, says the supply of attractive opportunities in the alternatives universe has not been depleted. “We have seen a marked improvement in the quality of opportunities in the hedge fund world, and the number of quality hedge funds expand,” Kennedy says. Yet institutions must carefully appraise what may seem like a glittering opportunity set. “Even so, if you look around the world at the 10,000 or so hedge funds and think what percentage of that total is worth the high fees, the result would be in the very low single digits.”

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