I’ve been wondering recently about investment returns of wealthy colleges. For example, NPR’s most emailed story right now is on advice from Yale’s investment “wiz”. He earned a 28% return on Yale’s investment last year, and has averaged around 17% return. Here’s the thing: aren’t rates of return tied to risk? Am I crazy? I thought that the higher return, the higher risk (in general) you were assuming. So are these super elite universities assuming lots of risk with their endowments? If so, isn’t just a matter of time before the risk “cashes in” and the endowments take a pretty hard hit? Or are these folks really wizzes? I don’t get it. I’m not sure why I’m thinking about this. I don’t have much money to invest. And in terms of thinking about these endowments, this is a fairly minor question (the more major one, in my mind, is why they’re not using them to transform the class distribution of their institutions).

8 thoughts on “risk”

  1. one possibility is that alumni could be gifting insider trading to the universities (in which case it is not risk). another possibility is that is risk but the treasurers are trusting that they are insured by the likelihood of an alumni bailout. i guess the only alternative possibility is that the efficient markets hypothesis doesn’t apply to the ivy.


  2. **Nerd alert**

    I saw the title “risk” on this post and an immediate flash of excitement passed through me as I imagined you were going to offer some commentary on one of my favorite board games.

    P.S. If anyone ever needs advice on which edition of Risk to buy, I have some very strong opinions.


  3. I think the answer is that institutions with humongous endowments have access to some high-yield investment opportunities that less wealthy institutions do not. Not all of them have to hit, but when some of them do, the payoff can be substantial.


  4. Well, I could be way off, but Swensen is kinda famous for being a lazy fund proponent – you can see p. 2 for the allocations for the Yale fund. Add in Kibitzer2’s correct point – that Yale has access to private equity deals which had until this past year been ridiculously lucrative, and there you have it.

    With few exceptions (and Swensen may indeed be one of them), endowment managers are sheep to Wall Street wolves. Ditto your city/state pension fund manager. They are very very smart, to be sure, but the resources needed to have knowledgeable oversight of contemporary finance are beyond most people. In fact, I had meant to post about what much more often happens to fund managers who invest in Wall Street.


  5. On your broader question about altering the class distribution … many (most? all?) Ivy’s are using their endowments — or, more accurately, increasing the payout of their endowments — to pay for the no-loan financial aid packages for undergraduates from poor-to-modest socioeconomic backgrounds.


  6. Actually, I really like Settlers, too (although I can never get enough brick!). But nothing serves to underscore the futility of war like Risk (or the far more complex “Axis and Allies”).


  7. In any single investment there is likely to be a tradeoff between risk and its expected rate of return. People are willing to accept a lower predicted rate of return if the variance of the rate of return is lower.

    But if you split your money between two stocks, both of which are high-risk, high-return, you end up an investment that is somewhat lower in risk, but still has a high expected return. How much lower in risk depends on how highly correlated the performance of the two stocks are.


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