The Yale Endowment Problems Are Similar to Those At Harvard

Recently it was reported that the Harvard Endowment had fallen at least 22 percent and was on its way to possibly a 30 percent loss once alternative investments are considered (see previous blog post). Now, the WSJ is reporting that the Yale Endowment has fallen 25 percent since the end of June when the endowment was valued at $10.1 billion (see WSJ article). Of interest is how marketable securities in the endowment "only" fell 13 percent, giving Yale a problem similar to Harvard - decreasing alternative investments, such as real estate and private equity, have caused the overall losses to be more severe than expected. As with Harvard, the diversification and increased use of alternative investments has helped Yale weather the downturn in the equities markets, but at the cost of decreased liquidity. The subsequent fall of less traded real estate and private equity markets has introduced a form of liquidity risk that was either unexpected, uncovered, deemed unimportant, or some combination of the three.

Fortunately, such endowments do not have the same problems with redemption requests that hedge funds experience, and can therefore possibly hold assets longer, waiting for more liquid markets. On the other hand, the academic endowments do rely on their investments for funding scholarships and supporting the general operating budget, among other things. At Yale, the endowment supports 44 percent of the $2.7 billion annual budget, or nearly $1.2 billion per year. With a decline of twice this amount in the endowment, belts at Yale will definitely needed to be tightened given that a guaranteed 16 percent return on the remaining approximately $7.5 billion would be needed in order to pay current expenses and still keep the principal in place. Of course, this just got more difficult now that the market is on its back, not to mention that the only sure bet in town - Bernie Madoff and his "guaranteed return" hedge fund - are out of business. Difficult times indeed.