Should You Invest in Private Funds?
David Swensen, longtime manager of the Yale endowment, made a bundle investing in private equity and hedge funds. But he argued that individual investors shouldn't try to mimic his strategy.
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.