The endowments’ capacity to wear significant illiquidity risk, and continually justify this in the face of related short-term volatility, is crucial. In past episodes, the paper notes, some schools have instigated bold strategies that would, in maturity, have been successful, but were pressured to abandon them after early losses brought media attention and complaints from the alumni. Here, “the pressures against contrarian strategies became too great”.

In other scenarios, some endowments attempted to hedge their exposures to venture capital in the late 1990s, but after losing money for several quarters through the hedges, were forced by their investment committees to abandon their positions – right before the dotcom crash.

The best way to cope with endowments envy, Abley says, is to study the endowments’ governance processes in conjunction with their asset allocations and deployment of resources. “The real advantage is trying to work out what the next area is and getting in there early. The governance structures of the endowments allows them to do different things that look very unfashionable and dangerous at the time, but that’s often the best way to invest for a long-term investor,” he says. “Partnering with who you invest in and being able to tolerate massive periods of underperformance over a number of years is far more replicable than trying to emulate a strategy that worked 10 years ago.” Obsessing over what worked well yesterday is an all too common mistake, Kennedy of Cambridge Associates says.

“But if you have a strong governance structure, it forces you to seek to understand what is likely to work well tomorrow.” Returns aside, other side effects from the rush into alternatives could siphon money from members’ balances. “In 10 years time, the big irony will be that even though the successful alternatives managers would have been massively successful in generating wealth for their stakeholders they will have indirectly caused wealth destruction for the average investor,” Abley argues. “A lot of people will be paying the high fees and, since the global economic pie available to investors in capital markets doesn’t change, if you increase the fees the investor pays for each slice of capital pie you’re going to decrease the overall pie available to the average investor.”

“There will be some great winners and they will get great airtime and exposure but on average the everyday investor is going to be worse off through endowments envy. And that’s a really big issue for the industry.”

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