The Challenge of Endowment Performance Evaluation

Abstract

This paper seeks to further the understanding of US university endowment performance building on recent research by both Hammond and Ennis. The paper finds that a Sharpe style analysis, as employed by Ennis, likely understates the true risk of endowments and therefore overstates alpha. This is because approximately 30% of the average endowments’ assets are invested in alternative assets with many of these being non-traded. This allocation to alternative assets serves to significantly reduce measured risk in comparison to true risk. The paper suggests using NACUBO’s reported asset classes and for those assets that are not easily mapped to return factors, to reference published research that provides guidance for estimating the true factor loadings of these non-traditional assets. Employing this methodology, the estimated annual alpha for endowments between 2009 and 2019 is -2.15% with a sensitivity range of -1.26% to -3.15% (all of which are significant at the 99% level) reflecting the uncertainty associated with the true portfolio style.