Investment Performance of University Endowments

University endowments provide long-term support for academic activities. Universities rely on the investment returns of endowments to continuously fund these activities. To pursue better investment performance, university endowments of all sizes have adopted the endowment model, which reduces holdings of public securities and increases allocation to alternative assets such as hedge funds, private equity, commodities, and real estate. This study documents the trend toward increasing allocation to alternative assets and evaluates the investment performance. Large university endowment funds have allocated a higher portion to alternatives and have higher rates of returns. Conversely, smaller university endowments have increased a lower percentage to alternatives and their performance trails that of larger peers, supporting prior studies showing that smaller endowments would achieve better performance by adopting the conventional 60/40 allocation in equity and fixed income strategy. We perform a regression analysis to examine the link between asset allocation and investment performance. The empirical results show that the impacts of equities and alternatives on performance are positive and significant. Furthermore, a comparative analysis indicates that investment returns exhibit high year-to-year volatility while the spending rates are stable and that the average rate of return is higher than the average spending rate.