David Swensen was the longtime manager of Yale University’s endowment. Over the course of more than 30 years, Swensen moved Yale’s endowment away from a traditional portfolio of stocks and bonds and into a mix of private funds, including private equity, venture capital and hedge funds.
Many individual investors wonder if they should try to do the same thing. But despite Swensen’s success, I don’t think it’s a good idea. There are four significant differences between an endowment and an individual:
Ability: Swensen had an uncanny ability to identify the very best investment funds. This is tougher than it seems, for two reasons: First, fund managers are generally intelligent and tell a good story. Second, and more importantly, even unskilled managers can have a run of luck which may make them looked skilled. As a result, it’s exceptionally difficult to identify truly talented investment managers.
Access: Yale has billions to invest. That, combined with Swensen’s reputation, gave him universal access to fund managers.
Resources: Swensen had an entire staff and the resources necessary to conduct comprehensive due diligence.
Tax status: High-octane funds have higher turnover and therefore higher taxes. As non-profits, universities don’t pay taxes, so they can more easily afford to be in funds like this.