The University of Michigan has changed the investments strategy used in its long term endowment pool, reallocating approximately $345 million to alternative investment managers. $100 million of that will be put into the hands of hedge fund Alyeska Investment Group.

 

Michigan currently has an endowment of approximately $10 billion. It is the ninth largest college endowment in the country and the third largest among public universities (Massachusetts Institute of Technology and the University of Texas are the two largest). Since its inception in 1999, Michigan’s endowment investment office achieved an annual return of approximately 10.2 percent.

 

Investing in hedge funds can be very dangerous and requires in depth research. Hedge funds promise risk adjusted returns no matter the economic conditions, but the majority do not live up to these standards. Through 2014, the average hedge fund had a three percent yearly return a ten year annualized return of 5.1 percent, as reported by the Wall Street Journal. In comparison, the Vanguard Balanced Index (a traditional 60 percent stock 40 percent bond fund) returned 9.8 percent on the year and 7.3 percent over the 10 year period.

 

 

Hedge funds become a questionable investment when you consider their lack of performance, extremely high fees, and the potential lock up periods in which investors cannot retrieve their money. A university’s endowment fund should be focused on growing its assets over time, so it can provide adequate funding for students and faculty. With Michigan’s strong returns up to this point, it seems that they are taking an unnecessary risk.  

 

Should endowment funds be paying such high fees to hedge funds when they can get the same returns from cheaper investments? Feel free to leave a comment or find me on Twitter @Andrew_Morse4