How The Rich Invest: A Look Inside Yale Endowment’s Asset Allocation

How The Rich Invest

Have you ever wondered how the rich invest? Well, look no further than seeing how the ~$42 billion Yale endowment fund invests its money.

Endowments invest like many of the world's wealthiest people and retirees. Both want income to fund their operations or lifestyles indefinitely. Both want to outperform their peers. And ultimately, both want consistently strong absolute returns, regardless of what the markets are doing.

After all, the first rule of financial independence is to never lose money. The second rule of financial independence is to never forget the first rule. As soon as you start losing money consistently, your dreams of living a life of freedom dissipate.

If you want to know how the rich invest, then analyzing university endowments makes sense. If you plan on retiring and living off your investments, studying university endowments is also insightful. At the end of the day, you want your investments to outlast you and provide for generations to come.

Understanding Endowment Funds And How The Rich Invest

Years ago, one of my tenants joined the Stanford University endowment as an analyst. So I asked her about their alternative investment allocation. She responded, “It's well over 50%.”

I was surprised because I don't know many regular folks who have that high of an allocation in alternatives. Maybe 5-20%, but certainly not 50%+. Currently, my alternative investment asset allocation is around 15%. I have a target to raise it to 20% in the new year.

My tenant said, “They've got no problem investing a majority of their assets in alternatives because they don't need the liquidity. The endowment has invested in alternatives for a long time already. Further, they are comfortable with the risk profile. Finally, they're only shooting for a 5% – 6% annual return. Most endowments are this way.”

I thought her response was interesting because it somewhat parallels my investment goals. More than 50% of my net worth is illiquid due to my long-term property investments, private equity/fund investments, and pre-tax retirement accounts such as my 401k, SEP IRA, and Rollover IRA.

If I could get a guaranteed 5% – 6% overall net worth return every year, I'd probably take it. Once you build a large enough financial nut, small percentages make a big difference. For example, a 6% return on a $5 million portfolio is a healthy $300,000.

And as we all know, earning $300,000 without any effort is enough to provide a middle-class lifestyle for a family in a big city.

How The Rich Invest: Yale University Endowment

The Yale Endowment helped pioneer alternative investing in hedge funds, private equity, real estate, and so forth.

In 1990, Yale became the first institutional investor and university endowment to define absolute return strategies as a distinct asset class, beginning with a 15% target allocation. Absolute return strategies is code word for hedge funds. Hedge funds look to provide a positive return in both bull and bear markets.

Who did Yale look towards first for absolute return strategies? Tom Steyer's Farallon Asset Management based right here in San Francisco. Ex-presidential candidate, Tom Steyer received his bachelor's degree from Yale.

Before starting Farallon in January, 1986, he worked at Morgan Stanley, Goldman Sachs in the risk arbitrage department under Bob Rubin, and Hellman & Friedman in private equity.

In 1987 Steyer approached David Swensen, Yale's CIO, to manage a portion of Yale's endowment for no fee to prove himself. After Farallon's initial success, other college endowments followed Yale's example. By then, hedge funds were now charging 2% of assets under management and 20% of the profits.

Although Steyer is worth about $2 billion, as an environmentalist, he still drives an eight-year-old Honda Accord to the tennis club.

Yale Asset Allocation Breakdown

Here is Yale's 2021 planned asset allocation as stated in their latest newsletter. This is where the rest of us can learn how the rich invest their money for even more money. The asset allocation breakdown is similar for 2022. See if you notice anything interesting.

Yale Endowment Asset Allocation 2021 - How the rich invest

Yale targets a minimum allocation of 30% of the endowment to market-insensitive assets (cash, bonds, and absolute return). Such assets will outperform in a bear market and underperform in a bull market.

The university further seeks to limit illiquid assets (venture capital, leveraged buyouts, private real estate and natural resources) to 50% of the portfolio. 

Yale's asset allocation is so diversified compared to the typical investor who might only invest in stocks and bonds. The reason for Yale's diversification is due to their size, access, experience, time horizon, and need for stability.

When you've got to fund your school's operating expenses every year, the need for more stable returns and passive income is a must.

Below is what Yale had to say about their own asset allocation in a previous investor report.

Over the past 25 years, Yale dramatically reduced the Endowment's dependence on domestic marketable securities by reallocating assets to nontraditional asset classes.

In 1990, over 70% of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic marketable securities account for less than 10% of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent nearly nine-tenths of the Endowment.

The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Today's actual and target portfolios have significantly higher expected returns and lower volatility than the 1990 portfolio.

Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The Endowment's long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.

Absolute return strategies are expected to generate a real return of 5.25 percent. Unlike traditional marketable securities, absolute return investments have historically provided returns largely independent of overall market moves.

Since its 1990 inception, the portfolio exceeded expectations, returning 11.2 percent per year with low correlation to domestic stock and bond markets.

Over the past two decades, the Endowment returned a cumulative 1,152 percent relative to the Cambridge median of 402 percent, an outperformance of 5.1 percent per annum.

Venture Capital Investing For All

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You can also listen to my hour-long conversation with Ben Miller, CEO of Fundrise, about venture capital and why he's so bullish on artificial intelligence and more.

Minimal Domestic Equities

Back in 2018, Yale’s domestic equity allocation was just under 10%. Today, Yale is shooting for a domestic equity allocation of only 2.25%! In comparison, most of us probably have most of our investment portfolio in equities and most of our equities in domestic equities. A 2.25% domestic equities allocation hardly moves the needle.

Also interesting is Yale's 11.75% foreign equity exposure. In most cases, individuals invest most of their public equity in their home country. This is also known as “home country bias.” Yale finds more opportunity abroad.

Real estate, my favorite asset class to build wealth, has a target 9.5% asset allocation. Although not particularly high, it is 4X higher than the domestic equity allocation.

Finally, about 65% of the fund is invested in Absolute Return, Venture Capital, and Leveraged Buyouts. The Yale endowment fund is essentially a fund investing mostly in other funds. Further, none of these funds are passive index funds like how most of us invest.

Yale Endowment Spending

Ever wonder what universities use their massive endowment funds for? Despite Yale's massive $31.2 billion endowment, it's still not enough to cover the school’s entire operating budget. In fact, Yale's endowment only covered about 30% of its 2015 operating budget. I'm sure the coverage will be similar in 2021.

Meanwhile, the endowment fund portion is allocated roughly one quarter to Professorships, one quarter to Miscellaneous specific purposes (??), on quartered to Unrestricted (??), and the rest to Scholarships, Maintenance, and Books.

The Miscellaneous and Unrestricted categories, making up more than half the endowment fund allocation are great mysteries. This is where a lot of private, eye-raising decisions are made.

Yale Endowment Spending - how do the rich invest

Individuals can easily replace Maintenance, Professorships, Books, Scholarships, etc with Housing, Food, Travel, Taxes, Charity, etc as part of their investment fund allocation.

How The Rich Invest: With An Open Mind

I hope this post gives you a glimpse into how the rich invest. Understanding how the rich invest helps give us better insights into how we can invest. You can even follow investments by rich members of Congress to make more money.

There is sometimes negative commentary about alternative investments. It usually comes from people who've never invested in alternatives before. It's as if we automatically attack what we don't understand.

Yet, the largest endowments and the wealthiest individuals like to invest a good portion of their assets into alternatives and actively managed funds.

Please keep an open mind with a focus on learning new things. There's a reason why the rich are rich and tend to stay rich! If you want to be truly rich, you've got to look beyond just index funds.

However you like to invest, please keep on building passive income for financial independence. The more passive income you can generate to cover your desired living expenses, the better.

Personally, I always like to invest in laggards or investments that are not mainstream. Stocks have done wonders for us so far. Therefore, I'm much more bullish on rental properties. Rental properties and commercial real estate should catch up and rebound in the new year.

Invest In Real Estate Alternatives

One of the best ways to go long rental properties and commercial real estate is Fundrise and CrowdStreet. Both are the leading real estate crowdfunding platforms today. Crowdfunding enables regular investors to invest in real estate once reserved for ultra-high net worth individuals or institutions.

Fundrise focuses on private real estate funds for investors to get diversified exposure in various real estate types across the country. Fundrise was founded in 2012 and is one of the largest real estate marketplaces today. Investing in a diversified fund is the more conservative way to go.

CrowdStreet focuses on individual commercial real estate investments in 18-hour cities. 18-hour cities are secondary cities like Austin, Memphis, and Charleston, where valuations are lower and net rental yields are higher. With work from home as permanent trend, there should be some positive demographic momentum towards 18-hour cities.

Both platforms are free to sign up and explore. I've personally invested $954,000 in real estate crowdfunding to diversify, earn income passively, and capitalize on heartland real estate. Real estate is one of the best inflation hedges and beneficiaries. Every single rich person I know has a large real estate portfolio.

Stay On Top Of Your Investmeents

To get rich, you need to stay on top of you investments. Sign up for Empower, the web’s #1 free wealth management tool. It will allow you to x-ray your portfolio for excessive fees, give you a snap shot of your asset allocation, and provide suggested allocation weightings based on your objectives.

After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible.

I’ve been using Empower since 2012 to manage my money. In this time, my net worth has skyrocketed partially thanks to better money management.

Free investment checkup tool to ascertain proper asset allocation

Readers, why do you think the rich invest so differently from mainstream investors? With a 65% allocation toward active funds in alternatives, Yale has a completely different investment philosophy. What are some alternative investments you are looking at right now? How do you plan to make your investments last for generations? How The Rich Invest is a Financial Samurai original post.

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52 thoughts on “How The Rich Invest: A Look Inside Yale Endowment’s Asset Allocation”

  1. Jess McDowell

    I just started reading “Wise Money” by Daniel Wildermuth. The idea is to help individual investors, not necessarily accredited investors, to invest like the Yale, Harvard, Stanford, etc. endowments. So far it has been very interesting.

  2. It makes me feel better to see Yale at 11% foreign equity. I know that I shouldn’t do this but I have a fair amount of my 401k invested in Fidelity target funds and they are relatively heavy in foreign equity.

  3. Frugal Bazooka

    Interesting post and I appreciate you using creative ideas to find new investment strategies, however I find the idea of tax free endowments for universities that exclude 94% of the applicants the height of elitist nonsense…esp a school like Yale (and Harvard and most other Ivy League bastions of the rich and famous) that has for years churned out anti-capitalist, anti-American academic propaganda. Besides making a killing in capital markets they also specialize in teaching students that capital markets are evil. I know most of that kind of nonsense is limited to the college of social studies, but the hypocrisy of these institutions is galling. If that wasn’t bad enough there is now a “plan” for working Americans to subsidize student loans to the tune of 50k per student? Here’s a better plan…force Yale and any other universities that have an endowment fund to pay off their student loans from the endowment before building a new rec center or student union. That’s an investment in education I can get behind.

    As far as following the investment lead of a Yale univ that has endless recurring tax free donations from wealthy alums and therefore little to no actual risk of ever being behind the eight ball financially…no thanks.

  4. Wealth from Options

    I wonder if they use leverage in their equities position to “ratchet” their fixed income. “The Floor-Leverage Rule for Retirement” has 85% in safe or fixed income which provides the “floor.” Leverage is used on the remaining 15%. Excess returns in the leveraged portion are then used to ratchet up the floor, permanently increasing future income. Interesting concept that I plan to look into more.

  5. I’ve long tried to gradually move to an endowment style portfolio. I even have it as a tag on my blog. The toughest area probably is venture capital. I have access to what seems to be a good venture investor here in Australia, but I can’t imagine giving them 23.5% of my net worth to manage. That seems too risky, so would need to find more good managers if I wanted to copy Yale exactly. So, I actually have a target of about 5% in venture capital and 5% in buyout at the moment. My target allocation to long Australian equity is 15%, 12.5% foreign equity (including US). But 21.5% to hedge funds (there are quite a lot of listed hedge funds. Two of my funds in this space are unlisted). Gold is 10%, real estate 10% (underinvested here), art 5% (only 1.5% so far), 10% to bonds (overinvested there still), 5% futures, and adding cash, I think that’s it.

    1. You could view Yale’s $31 billion endowment fund as its entire net worth when making asset allocation calculations. Or, you could view the endowment fund as a percentage of Yale’s overall net worth. After all, Yale itself has a value among other things Yale owns.

      1. No problem with 23% if I have say 5 potentially good managers to give it to. I’m just making the usual point that the more alternative you get the more important managers are and the more variable results are. You identify someone who was good but then blows up… For individual investors who aren’t very rich it’s tougher to access multiple potentially good managers in each asset class. So getting to a Yale like allocation without betting a lot on a few managers is hard. But if I can find a second good venture manager I’d be more than happy to increase from 5% to 10%. Especially as in Australia early stage venture has effectively negative tax.

  6. I’m guessing the universities don’t have to worry about tax consequences? If I had a million dollars, I’d have to be careful re earned income tax in investments.

  7. Read an article recently that over the last 10yrs the THREE FUND PORTFOLIO outperformed Yale and most endowment funds

  8. Really fascinating insights into how Yale invest’s its $31 billion! I would never have guessed it invests so little in domestic equities and invests so much in actively run funds.

    But, it’s been working for them for almost 30 years. Stocks do seem overvalued now. Hard to see similar returns going forward. I agree that it’s much better to invest in laggards instead.

  9. Thomas Schaber

    S&P 500 loses to this convoluted portfolio by less than .5% and costs millions less to administer. I’m sticking to S&P 500 as the only thing in my portfolio and I am 79.

  10. Ten Factorial Rocks

    Good dissection of the Yale model. As earlier commenters have said they have their world class resources to identify and exploit inefficiencies in alternate asset clauses. Because these good opportunities come to them, I suspect they rachet down publicly traded equities. Otherwise, they are not the same Asset class in my view because a mass consumer enterprise like McDonalds and a tech company like Cisco will have different fortunes and drivers. Yet they are both ‘domestic equities’. Being diversified among different sectors within equities provides adequate cover for most retirees. If you are able to live off dividends, even better as you are somewhat insulated from the market prices. I don’t think all the complex alternative investments are needed for most individuals. Opaqueness and forced lock-in of these asset classes also introduces risks that Yale can mitigate, but not most of us.

  11. Great article and comments. As a typical do it yourself retail investor with a moderate risk profile, I’ve been very careful in exploring alternatives. I have invested in REIT’s with a decent return as a low cost option that has provided decent yields of 5-9%.

  12. Great article and comments ! I always learn something from you and your readers. While I cannot add anything to the financial side of this article, I can add something about how schools like Yale use their endowment. My son just finished his 2nd year at a well known school in Massachusetts that has a large endowment.He will graduate in four years with zero debt and a small out pocket cost for me.In fact, it’s cheaper for him to attend that school with their very generous financial aid package,than it is to attend the local state school here in San Diego ! These schools with big endowments do make the COA very reasonable for lots of students and their families :)

  13. Thanks Sam, great post. Very interesting to see how the wealthy invest. Your post also got me thinking about another Ivy league school, right here in the SF Bay Area – Stanford! Interesting to see what the two endowments have in common and where they contrast. The link is below (table 2, asset allocation):

    I’m interested to get your thoughts (or anyone elses) on Stanford’s allocation vs Yale’s. I didn’t realize so much of these were in private equity and hedge funds.

  14. Can alternative investments be great wealth boosters? Absolutely. But as this years dismal hedge fund performance shows, actively managed isn’t really a panacea for bearish markets. I think the other valid point is that most people just won’t ever reach a point in their net worth, where alternative investments are even viable options. For most ventures, don’t you need to be an accredited investor?

  15. Financial Slacker

    This is so enlightening. Thank you for posting.

    Am I reading this correctly? They’re targeting a 5% total return, but have been generally in the double digits for the last five years?

    I am shocked at the very low allocation to domestic equities. But I don’t necessarily disagree. For a while now, I have been pessimistic about US stocks. I think over the next 20 years, as baby boomers retire, they will be selling equities putting downward pressure on the market.

    I’ve recently invested in a venture debt fund backed by commercial real estate (senior housing) paying a fixed cash interest payment.

    I’m less inclined to buy property directly due to concerns about management and maintenance. I’m not sure that’s how I want to be spending my time and I think the cost to outsource is too high.

    I have also had about 35% invested in foreign equities, although I wonder how well that has done for Yale. It hasn’t been great for me.

    One of the differences between Yale and ordinary investors is they have access to a wider variety of investments – specifically, LBOs and venture capital. I’m not sure how the average investor could replicate those asset classes.

    Financial Slacker

    1. Great post by Sam again, but I have to I agree with Financial Slacker’s last statement,

      “One of the differences between Yale and ordinary investors is they have access to a wider variety of investments – specifically, LBOs and venture capital. I’m not sure how the average investor could replicate those asset classes”

      Soo does the manager of the Yale Endowment, David Swenson. I initially was enamored with the Endowment investing model….until

      1.) I read David Swenson’s book, Unconventional Success, A Fundamental Approach to Personal Investing. Bottom line, he emphasizes his competitive advantage of access to top-tier VC and PE that VERY few have access to. I certainly don’t have the access….and unfortunately neither do the the lower tier hedge funds that would target an accredited investor like me and others on this site.. Their PR is great…but they really don’t have the access. Swenson goes almost 100% Bogel-head…low-cost passive indexes, 60/20/20 allocation with re-balancing, for most of us. Boring…but effective if you can do it…

      2.) I experienced the liquidity conundrum. I almost pulled the trigger on a 250K investment, but backed out after thinking whether I wanted this one locked up for 6-8 years. What if a good property came up to by with a great cap rate? I can’t leverage a VC investment like I can a piece of already-owned property. And, although property is somewhat illiquid and has high transaction costs, it is not as illiquid as VC/PE Bottom line, I got second thoughts.

      Anyway, great posts and comments….


      1. Yes indeed. Access and liquidity, two important variables everybody must consider.

        One of my 7 year private investments is winding down in 2017. It was a forced investment in illiquid distressed real estate in 2009 as my bank invested at least half of our bad bonuses in it. I’m so sad it’s ending, b/c it’s had a nice 22% IRR since. It’s nice to have the final 70% balloon payment, but I don’t know what I’m going to do with it next year. But I guess that’s why I’m thinking about new investments now. The key is to always be thinking 1-10 years ahead.

        A typical property median holding period is 7 years. It’s funny that it corresponds exactly with a typical holding period for a VC/PE fund. I suspect most of us believe we need more liquidity than we really do.

        1. I think most people would take 22% any time! Congrats on that one.

          And on the liquidity front; you are probably right again here. I had not looked at the comparison with property holding. Recently read something about Tim Duncan getting crushed on hedge fund investment that he had to liquidate due to divorce. Lost millions. One of those stories that makes one pause.

          Bottom line, if you believe in the investment and don’t have liquidy needs for the money during the lock-up period, then May be a great thing.

          Keep churning out great content Sam. Thx.

  16. Dr.J @ MedSchool Financial

    Its good to see that endowed professorships are a nice portion of the allocation as investing in good professors is a plus as well as the scholarships. It would be interesting to see what the “misc” portion entails. The endowed chairs apparently need a minimum of 2 mill and professorships 1 mill in permanent endowment at some higher ed institutions.

  17. Sam, awesome post and a prime example of what’s so unique about your blog. The data dive, the unique topic, and the personal anecdote that keeps it real.

    So here’s the VTSAX post (well, sort of) that likely drives more than one of your readers nuts.

    While it’s no doubt true that Yale’s uniquely large pile of money opens doors closed to many, there’s also no doubt that you are right in suggesting that nearly every hard working person–reading blogs like yours, anyway–has or will have the opportunity to chase returns with “alternative strategies” if he or she wants to.

    Doing so should not be rejected out of hand. But years of my own personal experience and journey have led me to reject doing this and instead follow a very traditional path to wealth. And there’s nothing unique about me or my personal experiences, believe me.

    Everybody’s biggest impediment to “investment” wealth is themselves. We are busy. In fact, most of us have an extremely “active” wealth accumulation strategy called a day job that takes up a lot of time and is our most valuable asset. “Free time” is full of enjoyable friend and family commitments, less enjoyable chores, and a few guilty pleasures (Jon Snow lives!). We think we will still have the time, patience and interest in being sophisticated investors across all styles, but frankly we can’t even be truly relied upon to do something as simple as rebalancing our stock and fixed income positions once a year. Yale pays people full time salaries to work full-time imagining, executing and managing its investment strategies. We have to do it on our free time.

    While I’m personally too interested (weak willed?) in investing to simply buy Vanguard’s balanced index fund, set up an automatic deposit, and never look again, the fact is I would be nearly just as well off if I did currently, and may look back one day less well off for not having done so. It may be the most boring investment vehicle ever imagined, dreamed up by perhaps the most boring broker-dealer we would ever see even if we were given 100 lifetimes. And after expenses it laughs at the average hedge fund and kicks sand on its face at the beach in front of all the girls. (A young and confident investor here will think, “Ah, well I will just be sure to invest in an above average hedge fund.” To which I say good luck with that.)

    Many traditional investors are also already diversified across asset classes, though I concede the obvious point we are not diversified within those asset classes like an endowment. But just for example, exposure to real estate beyond home ownership may be enviable, but just owning your own home has been a rising tide lifting boats for the middle class for decades, regardless of the bad wrap some try to give it (for both reasonable and extremely tenuous reasons). And you don’t have to be an accredited investor to buy one. In fact, you are welcome to be a lousy investor and still fall into a pile of money later as a person who happened to buy a house “back when they were cheaper.”

    Stepping outside of experiences personal to me and into my professional experience, I can also say lots of the rich do not invest the way Yale invests at all. In my experience, nearly all rich people are rich because of a business they built, because of their job, or because it was given to them. Except for the last class of rich, who are often unreliable stewards, their investments are vanilla, whether the strategy behind them is active or passive (individual stocks v. indexing). They purchase tangible things of value (collectibles of various types like cars and art) and real estate in their backyard (with the exception of a vacation house or two). They loan out money here or there. And that’s about it. Of course I’ve seen all other investments described, and truly cannot presently recall one instance where the folks with those investments hadn’t been worth more in the years before they came to see me than they were the day we met.

    1. Does John Snow really live? Man, what a spoiler if so! But it’s OK, as I figure he would.

      Everything is rational long term in investing. There is a reason why some asset classes exist and continue to exist: because they perform well and fill a need. If they were terrible, then they would die. And of course, no fund in one asset class is the same. Everybody would love to get in the Sequoias of the world, but nobody but the already rich can.

      We must talk to different rich people, b/c a large majority of people I know invest in alternatives. They are also alternative asset class managers themselves.

      1. Oh no! Sorry for any GoT spoilers!

        It would be interesting to figure out what the disconnect is between the rich I see and the rich you meet. My very wealthiest clients have typically been heavily concentrated in one stock, generally public though not always. And unwinding out of that wealth not particularly easy (or even desired, despite a private banker’s earnest advice otherwise). Generational wealth is different, but for the truly successful client in that “won the lottery” regard the actual investments are often much more opaquely presented to me as it is less relevant to what I’m doing. But my sense from you is that most of the folks you are thinking of are self-made. Maybe WA having no state income tax creates fewer incentives…

        1. “My very wealthiest clients have typically been heavily concentrated in one stock, generally public though not always.”

          Interesting….what is the demographic of your clients? I think there will be difference between client on the street and client at the bank. Concerning heavy concentration, I have seen this also. I saw a client lay down more than half a Big B on one stock, I suspect a large proportion of their portfolio. Talk about conviction!

        2. You make a good point though about how many people who are wealthy made their ships him through a business, inheritance, or something else. I am highlighting the wealthy who are financially sophisticated and have made money through investing long term. Yale university fits this description, and so do a lot of other wealthy financially savvy people I know who invest in this way. These are the wealthy institutions and people we should study if we plan to invest.

          And if we want to learn how to become wealthy building an Internet business, for example, then we should study the wealthy who have created huge Internet companies etc.

  18. PatientWealthBuilder

    if you are looking for alternative investments paying 5% or so why wouldn’t you want to hold the note on some mortgages? this would be the long-term time horizon and give you monthly passive income. you could structure them to balloon at 5, 7, 10 years or whatever forcing the borrower to refinance with you. That would give you the option to reinvest in another note or get out. a highly rated borrower with plenty of collateral would make that return very rich for the low amount of risk involved. hedge funds and others have been in this space for years. just another thought. Hey my last post over on my blog I laid out my own portfolio allocation – 65% stock, 30% real estate (includes my house), and 5% cash. interesting about Yale; those guys are killing it.

  19. I think there is more opportunity to take advantage of mispricing in alternative investments and that is why the endowment has pursued that category.

    I am not too surprised by the low allocation although I would expect it closer to 30%. There is a lot of competition with heavy hitters in the equities market and I’ve seen large institutions drag down a highly liquid stock with just one trade, causing others to dump because of the hit to their portfolios. There is somewhat more exclusivity outside the popular markets

  20. The Yale and Harvard’s of the world have access to private investment funds that no new investor can obtain access to, particularly marquee PE and VC firms new funds. Even if you wanted to get in today and were a billionaire or another endowment/foundation w/ billions it would be impossible. So the returns are great but next to impossible to reproduce.

  21. It’s truly amazing what only desiring a 5% return can get you. Especially if you have the enormous wealth to make it happen. Definitely something to think about and research.

  22. Ms. Conviviality

    I work for a public university that has $1.5 billion in endowments which puts it in the top 10% of universities/colleges. FY 2015 returns were 4.5% and the university’s goal is an annualized real rate of return of 5% net of fees, just like Yale’s. The investment strategy is allocated 80% for growth funds (public equities, hedged strategies, private equity), 12.5% for offsetting inflation (natural resources, real estate) and 7.5% liquidity (fixed income, cash). My university’s allocation for liquidity is similar to Yale but the allocation to inflation funds is 8% less than Yale. However, it doesn’t appear there are investments in leveraged buyouts. Our university established investment corporation manages the investments and the investment director is hired with the expectation that he/she will meet the 5% rate of return or employment will be terminated. With that type of pressure, it wouldn’t be difficult to take the risk and go for riskier investments. Due to the amount of money in play and diversification going on it seems that a 5% rate of return isn’t all that unreasonable to attain.

    1. You don’t work for the University of Florida do you? How long does the director have until they prove whether or not they can hit that 5% real return? You could easily have a superior strategy fall out of favor for a few years until it comes back into favor. Changing leaders every few years sounds like the same up or out strategies that wreck personal portfolios. The best active strategies are highly constrained by asset size. Yale and other Ivy League portfolios have access to the top managers because of the brand cache (bringing in more clients bc you manage money for Yale), fees they can pay, time horizon, asset size, and alumni connections. Once the hedge fund selection makes its way down to the smaller endowments, how can you expect to outperform passive portfolios after fees long term? How can you be sure you are getting even average managers? Also, what if these hedge fund investments were truly marked to market, how would the performance results look? If I managed an endowment with a firm up or out policy, that does not encourage accurate accounting.

  23. In Swensen’s book about the Yale investing style, he warns and worries about the prospect that all of the merely $500 million to $1 billion endowments out there will take their lead. He writes that the success Yale has achieved is very exceptional due to the large size of the endowment, ability to hire top talent, etc. I feel like all but the Ivy Leagues should just invest in passive equity first strategies until they have the kind of resources available to hire people to do things the Yale way. Instead they start focusing on hedge fund investments from the very beginning without the necessary skill

  24. I wouldn’t have guessed over 50%, fascinating. Never really thought about university endowments like this. Perhaps alternative investments get a bad rap because of the fees, riskier nature and that they are unattainable for most people and hence misunderstood.

  25. I’m surprised at how low the percentage of Revenue is derived from Gifts…i thought it would be much higher…to be fair, their gifts are much larger than any other University…

  26. Physician On FIRE

    Are there any funds available to pedestrian investors like me that mimic what the Yale or similarly large, successful endowments are doing?

    I’m happy with my Vanguard stock and bond funds, and I know they offer a managed payout fund. I’m curious to know if anyone is aware of an investment vehicle that is diversified like an endowment but available to individual investors.

    On a side note, I still have my acceptance letter from Yale. It was quite expensive to attend, which is pretty ridiculous when you look at the size of the endowment.

    1. Physician On FIRE

      To clarify, I decided to take a scholarship at my local State University instead, and looking back, I wouldn’t change a thing. If I had my heart set on finance, business, or law, Yale might have been the right choice. A Yale undergrad diploma doesn’t matter much in medicine.

  27. One of the key differences is the liquidity issue. If you have $1,000,000 invested then you have a ton of wiggle room because it’s extremely unlikely you would need access to the entire million, so you can afford to put more of it in alternatives that are less liquid but offer different risk profiles. If you have $100,000 or $10,000, your options are far more limited if you want liquidity without having to sacrifice return on a quick sale. Great insights from this dive, love it.

  28. “Once you build a large enough financial nut, small percentages make a big difference.”

    I agree with this, Sam, but in a sense the opposite statement also rings true, in my opinion. Yale can afford to take “chances” on alternative investments because of the large size of their endowment. Yes, I know, I just pointed out the fairly-obvious.

    I am by no means an investment expert, but I think the size of their endowment alone puts Yale in a position to accept higher than average risk. At the same time, I am a bit surprised that they don’t just minimize their risk and allow the size of their endowment to do its thing, considering especially that they don’t really need the money. Having access to an all-star team of advisors probably has something to do with it. Perhaps greater minds than mine can enlighten me a bit more.

    1. Awesome post! A couple years ago I read through all the Yale Endowment Reports that were available at the time. I love sneaking perks into how the wealthy structure their lives. Didn’t know that other finance nerds do the same thing!

      A couple of points that stuck with me:

      1. Yale has a well defined concept of what risk means to them. Conventional risk measures (standard deviation of returns) aren’t all that meaningful to a family, business, or institution. I think it was their 2010 report that defined their two main risks: (1) a significant drop (>10%) in Endowment support for the operating budget in an intermediate (5 year period), and (2) a large decline (50%) in purchasing power in the long-term (50 year horizon). Both of these have direct corollaries to individual investors seeking early FI: (1) relates to early retirement sustainability and (2) relates to effects of inflation on long term retirement plans.

      2. Yale tracks a measure they call the University Inflation Rate. Just like the government measures inflation by the changing cost of a basket of consumer goods over time (CPI), Yale formed it’s own basket based on institutional spending which they use in their inflation projections. (Typically this runs about 1% higher than the CPI which gives done insight into the riding costs of education.) Again, this has parallel implications for individuals. Your spending changes may actually be greater than, less than, or equal to the national inflation rate. Even if you don’t want to measure based on a fixed basket of goods, which is admittedly hard with changing lives, you can track year over year spending changes as a pseudo measure of your lifestyle inflation.

      3. Endowments all define a “spending policy” which is like an institutional version of the 4% rule. Basically they have a standard calculation based on the last couple years returns to see how much they can withdraw from the Endowment for operating budget support. This value is capped and floored to provide some semblance of fairness between current students and future students (I.e., Always withdraw be between 4% and 6% of Endowment to make sure that the current students are taken care of while ensuring that we don’t risk but having enough for future students). Again, direct implications: instead of always withdrawing 4% of our portfolio in (early) retirement, we should base this on recent returns; if the market is down, take less and ride the wave back up. Have fun now buy don’t jeopardize your golden years.

      4. Checkout the Operating Budget Revenue pie chart in this post. This appears in every report. As Financial Samurai readers, this should stand out to you. Note that the Endowment is only one slice of their annual income. Yale also thinks in terms of multiple income streams! Between the Endowment, their medical school, tuition, room & board, they have buffers, flexibility, and diversification of income streams.

      Anyway, I’m really glad to see this occasional model dig into in a note public and individual investors forum. Thanks Sam !

    2. I used to think your same way. Once you’ve accumulated a large enough net worth, you can take more chances. But when you see your net worth go down 10-35% in a year, that took over a decade to accumulate, you won’t think that way anymore. You will just be happy with a 5% return. After all, 5% on $5M is $250,000. Anybody should be able to live off that. You can take 10% of your net worth and go aggressive if you wish and hunt for unicorns. But I don’t recommend more.

      When did you start investing? I’ve noticed a big difference in those who started investing before 2008 and those who started after. Thanks

  29. Apathy Ends

    Interesting to see where they get revenue – that is a nice sized “Gifts” slice (wonder how it compares to public universities)

    Hard to spread out when the nest egg is on the smaller side – glad to see companies are making diversification cheaper for traditional households!

  30. I am really surprised at how well diversified their portfolio is with their 9 asset classes. I didn’t know this was even possible. Really interesting.
    What also struck me is the balance between domestic and international equities. We always read that a proper allocation would be 50% domestic and 50% international (weight based on market cap I guess?), but these guys have 2-4x more international than domestic. Same ratio if not more for real-estate exposure.
    Do we know how they came up with these 9 assets classes and how they decide on their allocation every year? I’m sure this would be part of their well guarded know-how, but I’d be curious to know what the method/rationale is.

  31. John C @ Action Economics

    Wow its amazing how much they have investing in things that most investors would balk at. almost a third of their endowwmned going to leveraged buyouts and venture capital is extremely surprising. My original assumptions about college endowments is that they played it extremely safe and invested mostly in large cap US funds, bonds, and real estate. DO you think the shear size of Yale’s endowment changes their investing strategy? Having $20 Billion I’m sure opens up many opportunities that average investors won’t come across.

  32. The Green Swan

    Those are some pretty awesome returns for Yale. I wonder what specifically would have generated those returns though. We know generally that the US equity and bonds didn’t perform to that level and foreign equity hasn’t been doing great in recent years. LBOs I know have come under intense scrutiny from the regulators so I wouldn’t expect those returns to be as great as they once were. Other thoughts? I wish there was a bit more transparency. Thanks for the interesting post.

    1. Thinking the exact same thing.

      Would be great to be able to get similar returns with a similar diversification. Granted I’d need a much larger net worth to keep my primary residence from skewing me so heavily towards real estate, but a man’s reality starts with his dreams!

  33. I’m shocked as well that such a small portion of the endowment is allocated to good ‘ol stocks and bonds. When I was at UNC for business school they shared their endowment investment holdings as well and it was much more traditional. They did have a 20-30% portion allocated to alternative investments, but I remember thinking that was even high at the time.

    Time to revisit my own portfolio and see if there is room for more alternative investments!

  34. Believe Fire

    I think alternative investments like absolute return get a bad rap because the majority of actively managed funds under-perform the market. Just like many other people, I’m reluctant to pay a sizable fee for an asset that will likely perform worse than the low-fee index fund I could have invested in. That said, I know there are absolute return investments that do perform well, and with proper due diligence, it’s possible to find ways to achieve better returns. Unfortunately, many, if not most, of the best alternative investments aren’t available to the average investor.

    1. Maynard Speer

      You’re right about the main reason, but that’s because most people don’t understand the purpose of Absolute Return investments is to diversify a portfolio – not act as a substitute for long-only equity exposure (which as you say can be obtained very cheaply)

      Yale’s domestic and international stock exposure outperforms the Absolute Return portfolio most years, but doesn’t diversify or hedge a portfolio generating most of its returns from private equity

      So Absolute Return is used the way most of us would use bonds or cash – and Swensen has his own position on why bonds are quite risky investments … As for retail investors, AQR have funds like QSPIX which (so far) seem to fit Yale’s criteria as well as anything

  35. I had never actually looked at my entire net worth holdings until I read your asset allocations by age post yesterday. I only really included the “investments” in equities and bonds, ignoring the cash and my home. Surprisingly, I was pretty much right on were you suggest for my age. Although I’m probably a little heavy on real estate, like most middle-income folks with large parts of their net worth tied to their homes. Never really considered the fact I do have a position in real estate already.

    Thank you for providing some actual value from experience in finance. If I have to read another “just put it all in VSTAX” post, I’ll go nuts. I’ve got some more accumulation to do, but I’d easily trade an extra year or two of working for a guaranteed 5% forever.

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