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Keith Black, PhD, CFA, CAIA
Associate Director of Curriculum
The sixty largest US college endowments (those with over $1 billion in assets) once again have chart-topping performance. After suffering drawdowns and liquidity issues in 2008 and 2009, these large endowments earned average returns of 12.2% in the fiscal year ending June 30, 2010, the latest period available, which beat the returns of smaller college endowments over the same period. Ten year annualized returns of 5.0% refute the idea of a lost decade, and the three-year drawdown of an annualized -3.5% from 2008 to 2010 seems relatively benign, at least when viewed in the rearview mirror.
According to the NACUBO-Commonfund Study of Endowments, the world's largest college endowments continue to increase their allocation to alternative investments. Year after year, allocations to domestic equities decline as allocations to alternative investments and international equities increase. On June 30, 2010, these endowments held 11% in US equity, 15% in international equities, 14% in fixed income and cash, and 60% in alternative investments. As alternative asset allocations have exploded since 2002, hedge fund allocations grew from 17.8% to 22.8%, private equity and venture capital raised allocations from 8.2% to 19.2%, and natural resources saw dramatic increases from 1.7% to 8.4% of endowment portfolio holdings. Yes, these highly successful investors now allocate more to international equities than US equities, more to hedge funds than fixed income, and more to private equity and venture capital than domestic public equities.
In order to walk like an endowment, investors need to investigate some keys to their success. First, endowments have a perpetual holding period. When viewed in light of the age of leading universities now surpassing 300 years, the ten-year lock-up period of private equity vehicles seems to be relatively short term. As the longest-term investors, charged with protecting the real value of endowment principal for future generations of students, universities are seeking to earn liquidity premia of 2% to 6% per year by investing in privately held vehicles with the idea that their perpetual nature allows them to easily handle this liquidity risk.
From a risk budgeting perspective, many endowment managers prefer to spend the majority of their active risk budget in alternatives. On average, these large investors now allocate to eight managers within traditional asset classes and over eleven in alternative asset classes. Endowments have exploited both their network of successful alumni and their first-mover advantage in allocating to the best performing managers, many of whom are now closed to new investors. While common wisdom assumes that the sole secret to endowment success is the large allocation to alternative investments, the top endowments enhance performance even further by allocating to managers who outperform. In fact, the largest endowments have historically outperformed within every single asset class, both traditional and alternative. Those investors seeking to replicate the success of endowments should be cautioned that this outperformance within asset classes can add up to 2% per year to performance, which is unlikely to be replicated by an alternatives-heavy allocation if investors don't have the talented staff and valuable network of invested managers that many endowments have cultivated.
During the market crisis that began in 2007, many investors started to second-guess the endowment model. When cash is dear, it can be difficult to have such large allocations to illiquid alternative investments and such small allocations to cash and fixed income. Sheikh and Sun, in a 2011 article in the Journal of Alternative Investments, explain that the cash and fixed income holdings of an endowment should be at least 6% to 14% of assets. By drawing down this cash cushion, the endowment can continue to fund spending to support the university budget, while avoiding the distressed sale of assets at the low point in the market. Universities with larger outstanding commitments to private equity and real estate vehicles may require larger fixed income and cash holdings to ensure meeting capital calls on a timely basis. To avoid liquidity crises, Siegel (2008) suggested laddering allocations to private equity and real estate funds, ideally at a schedule where distributions from maturing funds are sufficient to fund capital calls of partnerships of more recent vintages.
While the growth rate of alternatives holdings of large endowments may be approaching the largest possible level, other institutional investors continue to increase allocations to alternative investments in hopes of catching up with the top universities in both returns and alternative allocations. To truly compete with the Ivy League, investors need to aggressively rebalance allocations, carefully source top-performing managers, make large allocations to alternatives, and embrace liquidity risk. This is easier said than done; however, as inevitable market crises will test the patience and liquidity structures of investors with large holdings in alternative investments. Those who have taken the time to study the rigorous CAIA program will be among the best prepared to add value in a world that is becoming increasingly focused on alternative investments.
To improve performance, facilitate networking, and create a better user experience, CAIA.org got a fresh look and new tools to help you connect with the CAIA community around the world. Visit now.
On October 3, CAIA Association opened registration with a new offering: the ability to schedule an exam nearly immediately. This gives early registrants an advantage of the best choice of available dates and times to sit for the exam. Early first-time registrants also enjoy a $100 discount on exam fees. Learn more about how to register here.
New candidate totals for the September 2011 exam session increased by 33% over March 2010. More candidates enrolled for this cycle than any other cycle since 2008.
By Vikas Shah
The CME Group has been at the heart of the futures and options markets since they began. They were responsible for the birth of modern futures trading and led the standardization of futures contracts, formation of the clearing process, and introduction of financial futures, cash-settlement and electronic trading systems which the world now use. The corporation, formed by the merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), also owns the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX). At the helm of CME Group is Craig Donohue, who, during his tenure as Chief Executive Officer, has completed more than $20 billion in mergers and acquisitions. Mr. Donohue was named to Institutional Investor's Power 50 list of the World's Most Influential People in Finance and recognized as the International Executive of the Year by the Executives' Club of Chicago. He is a member of the Wall Street Journal's CEO Council and serves on the steering committee for its Future of Finance Initiative. He serves on the Commodity Futures Trading Commission's Global Markets Advisory Committee and is a Board member of the Executives' Club of Chicago, the Chicago Council on Global Affairs, and the Council for Economic Education. Read more
Level I: As of October 18, candidates who completed the Level I examination can log in to the website and receive their exam results. Candidates will receive an email notification when their results have been released.
Level II: Candidates who completed the Level II examination can log in and receive their exam results beginning October 24. Candidates will receive an email notification when their results have been released.
CEO Florence Lombard will speak at Schwab Impact 2011 November 1-4 in San Francisco, CA. CAIA Association is an exhibitor at this this event. Please stop by booth 1225 and attend the CAIA San Francisco Congratulations and Commiserations Event.
CAIA Boston Educational Event
Tuesday, October 25, Boston College Club
"The Good, The Bad, and The Ugly: A wide-ranging discussion on the Battle of the Bens, Divvy-swaps, and the Ultimate Tail Risk Protection"
James Montier, Grantham, Mayo, Van Otterloo (GMO)
CAIA Canada Congratulations and Commiserations Event in Toronto
Monday, October 24, Cambridge Club
CAIA Canada Congratulations and Commiserations Event in Montreal
Thursday, October 27, La Coupole
CAIA Chicago Educational Event
Tuesday, October 18, Club Quarters
"Private Equity: Why Now and How?"
Tim Bliamptis, Co-Founder and Managing Director, Weathergage Capital;
John J. O'Connor, Managing Director and Equity Strategist, Fort Washington
CAIA Chicago Congratulations and Commiserations Event
Thursday, November 3, Elephant and Castle
CAIA Hong Kong Post-Exam Drinks
Thursday, November 17, The China Club
Stay tuned for more details
CAIA London Networking Event and Macallan Tasting
Wednesday, October 26, Lansdowne Club
CAIA London Educational Event
Thursday, November 10, Lansdowne Club Ballroom
"Macro Panel discussion on Best Ideas 2012"
Mr. Colm O'Shea, COMAC Capital; Mr. Jamil Baz, GLG; Mr. Michael Phelps, BlackRock; Mr. Neil Phillips, BlueBay
CAIA Los Angeles Networking and Social Event
Tuesday, November 8, BOA Steakhouse
Stay tuned for more details
CAIA New York Congratulations and Commiserations Event
Tuesday, November 1, Papillon Bistro
CAIA San Francisco Congratulations and Commiserations Event
Wednesday, November 2, Blanc et Rouge
CAIA Singapore Post-Exam Social
Tuesday, October 25, The Moomba
CAIA Switzerland Educational Event in Zurich
Tuesday, October 25, Park Hyatt Zurich
"Managing an Alternative Portfolio in a Post-Crisis Environment"
Grégoire Haenni, CIO of CERN Pension Fund; Nicolas Salomon, CERN Pension Fund
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