Risky Business for the Almighty ROI: Alternative Assets in Higher Education Endowments

Higher education institutions (HEI) are heavily reliant on alternative revenue streams to mitigate rising operational costs. One alternative revenue source is the endowment, an aggegation of assets invested to support the institutional objectives of an HEI through generated income. Before the 21st century, institutions have typically sought after more conservative investment strategies via traditional asset classes like bonds and equities. The growing financial obligations to educate students has led endowment managers to make a shift in their investment strategies towards alternative assets classes – private equity, venture capital, secondaries – in order to gain advantage in generating alpha (α) and a great return on investment. This study examines the institutional characteristics that influence these decision makers to invest in alternative assets as well as the relationship between alternative assets allocation and endowment returns. Using a secondary dataset provided by the 2023 NACUBO-Commonfund Study of Endowments, this study analyzed institutional traits and alternative assets allocation through quantitative methods. Findings indicate that HEIs with larger endowments allocate a greater percentage of their portfolios to alternative assets and that HBCUs are more likely to invest in alternative assets – though this finding was nuanced due to the institutions that reported into the dataset. In addition, this study revealed that while alternative asset investment strategies may yield a negative return in the short term, positive relationship in net return begin in as little as three years and significant advantage in alpha (α) generation over a five-year time horizon when investing 15% or more of a portfolio in alternative assets. These results provide insights for institutional leaders and policy makers regarding endowment management strategies, as well as emphasize the importance of balancing risk tolerance to long term, institutional objectives.