Yale University Investment Office 2006

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Case: Yale University Investment Office : August 2006 Summary: The Case is about the decision of the Yale Investments Office whether to continue to allocate the bulk of the university's endowment to illiquid investments--hedge funds, private equity, real estate, and so forth. Important is to consider the risks and benefits of a different asset allocation strategy. Before the choice between different subclasses, e.g., between venture capital and leveraged buyout funds would be analyzed it is advantageous to get first background information. Effective management of a university endowment requires balancing fundamentally competing objectives. On the one hand, the University requires immediate proceeds to support the current generation of scholars. On the other hand, investment managers must consider the needs of generations to come. In order to understand the behavior of the Yale University would be a view thrown in the past helpful. In the 20th Century the growth of the Yale endowment was accelerated rapidly due to enormous bequests and big investments in equity. In 1930 equities represented 42% of the Yale endowment this was in comparison to other universities (11%) very high. Because of the Great Depression severe erosion of its endowment was avoided in 1930, but in the end of this decade reduced a treasurer of Yale the share of equities. The reason was that higher taxes expropriate profits. He assumed that bonds better perform than stocks. For the next two decades, treasurer selected individual bonds & high yield or income orientated stocks for the portfolio. In the 1950s and 1960s this strategy was less useful for the bull market so they had to change their policy. First Yale decided to increase substantially the university´s exposure to equity investments and second Yale decided to contract out much of the Portfolio Management function to an external
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