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Short Summary
Main recommendation: Ben Felix argues that individual investors should not copy large institutional "endowment model" allocations to alternative assets like hedge funds, private equity, and private real estate, because the evidence does not support their use. He cites Yale's record, pension and endowment underperformance, and the Norway sovereign fund's largely passive, low-cost approach as reasons to favor a mostly passive, evidence-based portfolio instead.
Key Points
- The endowment model, popularized by Yale's David Swenson, spreads assets across traditional stocks and bonds plus alternatives such as absolute return hedge funds, venture capital, leveraged buyouts (private equity), real estate, and natural resources.
- Using institutional allocations to sell alternatives to high net worth individuals is an appeal to authority, a logical fallacy.
- After 2008, state and municipal pension funds roughly doubled their alternatives allocations, but the 2018 "Grand Experiment" paper found they gained neither lower risk nor higher returns.
- A 2020 paper found public pension funds underperformed passive investing by about 1% a year and endowments by about 1.6% a year, roughly matching the fees their alternatives and active management implied.
- Alternatives diversified well from 1999 to 2008, but in the following decade their returns were fully explained by public stocks and bonds.
- Rising correlations, crowded capital, higher private-market valuations, and smoothed reported returns (which understate volatility) have reduced the expected benefits of illiquid assets.
Details Worth Noting
- Concrete instructions: The transcript gives no step-by-step personal investing procedure. Its actionable guidance is to avoid paying for alternative investments pitched on the basis of institutional use, to be skeptical of claimed excess returns and diversification from alternatives, and to favor a passive, low-cost portfolio configured to your risk tolerance and preferences, as the "Failure of the Endowment Model" paper suggests institutions should do.
- Yale's FY2021 target mix was 23.5% absolute return hedge funds, 23.5% venture capital, 17.5% leveraged buyouts, 11.75% foreign equity, 9.5% real estate, 7.5% bonds and cash, 4.5% natural resources, and 2.25% U.S. equity.
- Educational endowments allocated about 58% to alternatives at the largest institutions.
- The "Failure of the Endowment Model" paper estimates alternatives costs at 2% to 4% per year, and average manager counts at large university endowments rose from 18 in 1994 to 108 in 2019.
- Norway's Government Pension Fund Global, over $1 trillion in assets, caps unlisted real estate at 7% and unlisted renewable energy infrastructure at 2%, uses tight tracking error limits, and has total management costs of 0.08% per year with about 0.17% excess return after costs.
Bottom Line
The transcript's evidence argues that the perceived edge of alternative investments has largely disappeared, so the institutional track record is a weak reason for individuals to buy them.
