by Patrick J. Schena, Eliot Kalter
While it is true that Sovereign Wealth Funds (SWFs) have been attracted to university endowments as models of institutional investment, this interest has not been relegated exclusively to sector and class allocation, especially in alternative assets, but rather also extended to organizational and governance structures as they might support or enhance the investment process.
However, in the aftermath of the recent financial crisis and especially poor performance, with a particular focus on the Harvard endowment, these strategies have come under intense scrutiny. As Tony Tan, formerly deputy chairman of the GIC of Singapore noted over two years ago, the idea of the endowment model had become influential, but inherent challenges, related primarily to liquidity, required all investors to rethink the efficacy of the strategy.
In this short research note, the authors revisit the discussion of the endowment model again in order to explore an agenda for future research that will hopefully (and eventually) free us from a fascination with models in favor of a more balanced analysis of the critical factors which define investment allocation strategies, their monitoring and review, and their evolution based on changes in the behavior of global investors, our understanding of pricing and risk structures under stress, the inter-relationship between the two, and the impact for both on the liquidity of assets.
The balance of this short note first establishes a baseline from which to rethink the endowment model; it next defines the three “L’s”, and then presents some recent evidence of the investment behavior of endowments relative to other investment vehicles – namely pension funds and SWF.
It ends with some prescriptive comments on an agenda for future research. Their modest objective in this brief is to encourage the nascent intellectual/practitioner search for solutions to the liquidity risk puzzle.