Top foundations' 10‐year plunge into alternatives yields mixed results and high fees

• Author: Wenqi Chu,Jeff Hooke,Ken Yook
• Published date: 01 March 2019
• DOI: http://doi.org/10.1002/nml.21338
• Date: 01 March 2019

RESEARCH NOTE

Top foundations' 10-year plunge into alternatives

yields mixed results and high fees

Jeff Hooke

1

| Ken Yook

1

| Wenqi Chu

2

1

Johns Hopkins University Carey Business School,

Washington, District of Columbia

2

CEIBS Business Online

Correspondence

Ken Yook, Johns Hopkins University Carey

Business School, 1625 Massachusetts Avenue,

Washington, DC 20036.

Email: kyook@jhu.edu

Private foundations control a sizable pool of investment

capital. This paper examines the endowment returns of pri-

vate foundations. Over the 10-year period, 2006–2015, the

top 56 of these organizations fully embraced the “Yale

model”of portfolio construction. As a group, they substan-

tially cut allocations to publicly traded stocks and bonds in

favor of illiquid alternatives that supposedly offered higher

returns and lower volatility. Despite pursuing risky invest-

ments in illiquid alternative assets, our study concludesthat

the foundations were not “paid”for illiquidity in terms of a

meaningfully return premium (vs. public markets). More-

over, their annual return volatility, or risk, was similar to

either a 60–40 composite index portfolio or a typical public

pension plan, both of which had lower equity-type expo-

sure and greater liquidity. The implication is that founda-

tions can achieve the same returns with better liquidity

and/or lower risk with passive investments in broad index

mutual funds or similar vehicles. In addition, we estimate

the third-party money management fees of the top founda-

tions to equal 1.43% of the assets for the fiscal year 2016.

This 1.43% is a sizable number when compared to the 5%

of assets (including overhead expenses) that the federal

government requires that foundations distribute each year

in furtherance of their charitable missions.

KEYWORDS

alternatives, foundations, returns

1|INTRODUCTION

Charitable foundations include two types, private and public. A “private foundation”derives its

money from a family, an individual, or a corporation. A “public charity,”on other hand, derives

Received: 24 March 2018 Revised: 10 August 2018 Accepted: 16 August 2018

DOI: 10.1002/nml.21338

Nonprofit Management and Leadership. 2019;29:449–460. wileyonlinelibrary.com/journal/nml © 2018 Wiley Periodicals, Inc. 449