Yale University, the second richest educational institution with a $19.3 billion endowment, managed by David Swensen, reported that it would increase its hedge fund assets. Last year, the university reduced its stakes in hedge funds by 14.5 percent and shifted into cash.
Based on the report from the Yale Endowment Office, the university’s target is to increase its hedge fund holdings by 18 percent. The university also increased its private equity and real estate target to 35 percent and 22 percent respectively.
The funding for the increases in the hedge fund target and private equity target will come from a one-percentage-point reduction in its holdings from both domestic equity and foreign equity targets, and the increase in real estate target will come from a decrease of two percentage-points in natural resources target.
According to the report, the Endowment Office is biased towards equities in order to generate higher returns. The university plans to use the potential returns for its current operations and to preserve the purchasing power of assets. In 2012, the Endowment provided 35 percent or $994 million of the Yale’s $2.85 billion operating income.
The Yale plans to invest more than 95 percent of its endowment in assets that are expected to deliver equity-like returns through holdings of domestic and international securities, absolute return strategies, real estate, natural resources, and private equity. In 2009, Yale incurred a 24.6 percent loss from its investments.
Since 1985, Swenson has been responsible for implementing investment strategies for the university to generate outstanding profits. He developed the non-traditional investment strategy known as the Yale Model, which favors illiquid, alternative assets, and uses a long-term approach. Under his management, the Yale Endowment grew from $1 billion to $19 billion.
Over the past two decades that ended June 30, 2012, the Yale Endowment delivered a cumulative return of 1, 204 percent, relative to the Cambridge median of 413 percent. The Endowment’s out-performance was 5.2 percent annually.