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University Endowments in Seven Questions

EXECUTIVE SUMMARY

  • To a large extent, universities resemble alternative money managers: Shared characteristics include high asset volatility, leverage and exposure to liquidity risk.
  • As a rule of thumb, university endowments can think about their risky allocations as the ratio of a risk premium divided by the variance of risky returns (adjusted by risk aversion).
  • Non-endowment assets and liabilities are not adequately reflected in portfolio construction. Asset allocation can be materially different when the non-endowment balance sheet is factored in.
  • Endowments may want to consider capital-efficient ways of combining active fixed income management with passive equity management.
  • The optimal share of illiquid assets depends mostly on the liquidity risk premium and liquidity needs over a medium-term horizon.

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