COVID-19 has challenged how universities can fundraise and do business, and it has not helped that the market has reached extreme levels of volatility. Because of these challenges, many endowments are rethinking the Yale model of investing. Institutional Investor reported that the long used method "[doesn't] protect investors during times of crisis."

Andy Daly, Managing Director, told Institutional Investor, “When we look at that model, it’s obviously served higher education clients over time because it’s paid to take risk, and they do have fairly high spending rates.”

But things are changing at universities. Recently published data from the Alpha Nasdaq OCIO indexes shows that endowment and foundation OCIO clients lost 6.43 percent on average for the one-year period ending March 31, underperforming a simple 60/40 benchmark.  

SEI is focusing on is taking a look at what portion of assets in an endowment can be used to fund an operating deficit. For those assets, an endowment may consider keeping them liquid, even if that risks long-term returns.

These endowments could look at putting 10 to 15 percent of their assets into cash as a “rainy day” account.

An endowment could also take a look at the types of asset pools it has available, Daly said. Some assets are restricted, which means they can be used for one specific purpose, like scholarships or a new athletic building. Others don’t have those restrictions. An endowment can use that information to decide what percentage of assets to put in risky investments versus cash, Daly said.  

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Legal Note

Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). Neither SEI nor its subsidiaries is affiliated with any firms mentioned herein.

Investing involves risk including possible loss of principal. Diversification may not protect against market risk. There is no assurance that an investment strategy or risk management will be successful. Alternative investments are subject to a complete loss of capital and are only appropriate for parties who can bear that risk and the illiquid nature of such investments.

An OCIO is an outsourced chief investment officer. Tail-risk hedging strategies profit from significant market corrections. They seek to enhance returns over the long-term, but investors must assume short-term costs. A traditional 60/40 portfolio is typically comprised of 60% stocks and 40% bonds.

Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

The Alpha NASDAQ OCIO indices are a series of 9 indexes composed from more than 600 OCIO (Outsourced Chief Investment Officer) equally weighted client account historical returns across 26 asset classed provided by 16 OCIO managers.

SEI client data as of June 30, 2020