Working Paper: NBER ID: w18173
Authors: William N. Goetzmann; Sharon Oster
Abstract: The asset allocation of university endowments has recently shifted dramatically towards alternative investments. In this paper we examine the role played by strategic competition in motivating this shift. Using a metric capturing competition for undergraduate applications, we test whether endowment performance relative to a school's nearest competitor is associated with the likelihood of changing investment policy, and conditionally, whether the nature of that change is consistent with the goal of "catching up" to its closest rival. Conditional on indicating a policy change, we find that endowments appear to use marketable alternatives - i.e. hedge funds - to catch up to competitors. More generally, we find evidence that endowments with below median holdings of alternative investments tend to shift policies in that direction. Besides herding behavior we also find trend-chasing behavior. Endowments with recent positive experience with various alternative asset classes tend to increase exposure to them. We consider the long-run implications of this competitive and trending behavior for the ability of endowments to deliver intergenerational equity.
Keywords: university endowments; asset allocation; alternative investments; competitive behavior
JEL Codes: D4; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition among universities (D29) | asset allocation decisions (G11) |
| endowment performance lags behind nearest competitor (D29) | change in investment policy (G11) |
| relative performance (P17) | policy changes (J18) |
| below-median holdings of alternative investments (G11) | shift towards increased exposure to marketable alternatives (G19) |
| recent positive experiences in alternative asset classes (G11) | increase investments in those areas (H54) |
| competitive pressures (L11) | systematic change in asset allocation policies (G11) |