What Do University Endowment Managers Worry About? An Analysis of Alternative Asset Investments and Background Income

Abstract

This paper examines whether university endowment managers think only in terms of the assets they manage, or also take into account background income, the other flows of income to the university. Specifically, we test whether the level and variability of a university's background income (e.g., from tuition and government grants) affect its endowment's allocations to so-called alternative assets such as hedge funds, private equity, and venture capital. We find that both the probability of investing in alternative assets and the proportion of the portfolio invested in such assets increase with expected background income and decrease with its variability.

The Role of Fund Managers in Diversifying Endowment Investment Portfolios of Malaysian Public Universities

“…According to Commonfund Institute (2018), there are large differences in asset allocation for different endowment organisations (i.e., healthcare organisations, educational endowments, and community foundations) that lead to variations in investment returns. Top-performing university endowments tend to invest in alternative assets in order to gain higher returns, although this is riskier and more illiquid (Lerner et al, 2008;Kaplan & Schoar, 2005;Rosen & Sappington, 2015;Dimmock et al, 2018;Black, 2013;Qu, 2020) and may have an adverse effect on the performance of endowment funds (Ennis, 2021). However, the performance of an endowment fund does not depend on investment in alternative assets only, but also on other significant factors, such as asset allocation strategy and the ability of endowment managers to select profitable shares and other investment portfolios (Moore, 2017;Brown et al, 2010).…”

To borrow or not to borrow? An analysis of university leverage decisions

“…If certain variables affect leverage and endowment investment strategies simultaneously, 13 investment income is endogenous to the leverage 13 One variable that might affect both leverage and endowment strategies is the volatility of endowment income. Dimmock (2012) and Rosen and Sappington (2015) show that the volatility in university income affects the proportion of an endowment invested in alternative assets, which, in turn, affects the decision and should be excluded from the regression equation. Second, the four-year average includes the contemporaneous value of income.…”

What Constitutes Prudent Spending from Private College Endowments? Evidence from Underwater Funds

“…UPMIFA had a measurable impact on endowment spending, but I do not measure its indirect impact on endowment asset allocation or on other revenue sources, such as tuition. Many empirical studies of endowments take spending rules as given and examine investment choices (Black 1976;Thaler and Williamson 1994;Lerner, Schoar, and Wang 2008;Brown, Garlappi, and Tiu 2010;Dimmock 2012;Goetzmann and Oster 2015;Rosen and Sappington 2016). In contrast, Merton (1993), Hoxby (2015), and Gilbert and Hrdlicka (2015) lay out full models of both investment and spending, taking into account the college's other revenues and expenses.…”