Its All David Swenson's Fault
Topics :
Finance ·
Aug 26, 2009 | 0 Comments
A favorite line of mine during the sub prime crisis has been that "Its all David Swenson's Fault".
David Swenson is the Chief Investment Officer of Yale's Endowment. The endowment fund has generally outperformed the market by a big margin. The big insight of David Swenson was that for institutions like Yale and Harvard whose liabilities are way into the future, they can take more illiquid positions and make more returns when other investors wanted a liquidity premium. Obviously, this meant an increased asset allocation to alternative investments like Hedge Funds, Private Equity and Venture Capital.
In tried and tested fashion, other investors looking at Yale's success decided to chase increase thier own alternative investment allocations which led to a boom in Hedge Funds, Private Equity and Venture Capital.
A boom in Hedge funds meant more money chasing the alpha which in turn meant more money chasing the "Z Tranches"- the most dangerous part of a subprime structure but with the highest return. More buyers of the "Z Tranche" meant more Investment Banks tried to originate these sub prime mortgages, which pushed the S&L's to give more loans, which the consumers exploited even more.
There were similar stories playing out in other major alternative investment asset classes such as Private Equity (the LBO Boom) and the Venture Capital business.
Now, Bill Gurley has posted on What is Really Happening to the Venture Capital Industry. He talks about the same David Swenson factor in overfunding in the VC/Alternative investments area. They key part:
=====
Over the past decade or so, a large number of very influential institutional funds have substantially increased their allocation in alternative assets. In some extreme cases, these investors have taken this allocation from a conservative amount of say 15-20% to well over 50% of their fund. Many people suggest that David Swensen at Yale was the original architect of a strategy to adopt a much higher allocation to alternative assets. Regardless of whether he was the leader or not, several funds simultaneously adopted this higher-risk, higher-return model. (For a more detailed look at how this evolved and why, see Ivy League Schools Learn a Lesson in Liquidity and How Harvard Investing Superstars Crashed. For an even deeper dive including comparative asset allocation models see Tough Lessons for Harvard and Yale.)
=====
The key takeaway, as always, what works for somebody else need not work for you. Each financial institution has different asset and liability time horizons which needs its own asset allocation strategies.
Make a comment