The Behavior Gap is not just a problem for individuals. I was reviewing some old posts and ran across this one about the Yale Endowment fund. At the time I was doing some work for a large university endowment and was surprised at how eager, almost anxious, they were about finding alternative investments of any kind.
I remember specifically having the conversation in a committee meeting where they asked me, “What is Yale doing?” I also remember one of the members telling me that they were going to invest in a pool of distressed loans because he was a banker and “understood that most of the risk was behind us” (late 2007…we know how that turned out).
Well, this is old news, but in 2009, despite the Yale envy, its endowment suffered a loss of 25%. Harvard was down almost 27.3%. (According to one survey the average endowment lost 18.7% for the same time.)
Both were due in large part to “problems with their private equity and hedge fund portfolios.” The thing everyone else was trying to get in on ended up costing them shortly after. The worst part about it is so much of the money rushing to be like Yale got in too late. Not only did they take it in the shorts, but they missed the ride up before the fall.
This is a very painful lesson that has been playing out on campuses across the country as departments are closed and jobs cut. Granted this is only one year, and Yale has done well for years. It’s one more example of how emotions (greed) can drive us to make poor investment decisions even when we are on a University Endowment Investment Committee.
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