How Do Financial Expertise and Networks Affect Investing? Evidence from the Governance of University Endowments

Abstract

We examine the links between human capital and endowment investing. Harnessing detailed information on university endowments, we find that higher asset allocations to alternative assets accompany higher levels of human capital in the endowment’s investment process. Moreover, high levels of human capital are linked to larger returns, even on a risk-adjusted basis. The improved investment outcomes arise because endowments capture higher returns that can accompany alternative assets, select or have access to high performing managers, and minimize fees by accessing funds directly rather than through funds of funds. Our measures of human capital include expertise in alternatives on governing bodies, the presence of a chief investment officer and the size of the investment staff. We also find that a university board’s professional networks are linked to higher allocations to private equity. Finally, we conduct a novel survey of endowments and confirm that human capital is central in facilitating alternative investments.