Investment Management & Endowments Flashcards

The 'Yale Model' (endowment model) of institutional investing is characterized by:

Answer: A highly diversified strategy emphasizing alternative assets such as private equity, hedge funds, and real assets

The Yale Model, developed by David Swensen, emphasizes heavy allocation to alternative asset classes—private equity, real assets, and absolute return strategies—to achieve superior long-term returns through diversification.

An 'absolute return' strategy in endowment investing aims to:

Answer: Generate positive returns regardless of overall market direction

Absolute return strategies seek positive returns in all market environments using diverse, uncorrelated approaches, helping endowments reduce volatility and protect capital during market downturns.

A foundation's endowment 'spending policy' is important primarily because it:

Answer: Determines how much of the endowment can be distributed annually, balancing current impact with long-term sustainability

A spending policy governs the annual distribution rate from the endowment, which is critical for balancing current charitable impact with the long-term preservation of real purchasing power.

What is 'currency risk' in the context of endowment management?

Answer: Potential losses from changes in foreign exchange rates affecting international investment values

Currency risk arises when a foundation holds investments denominated in foreign currencies; exchange rate fluctuations can increase or decrease the U.S. dollar value of those holdings when converted.

Compared to a small community foundation, a large university endowment can more readily invest in illiquid alternative assets primarily because:

Answer: Large endowments benefit from economies of scale, specialized staff, and longer time horizons that make illiquidity tolerable

Scale enables large endowments to access institutional-class alternative investments (private equity, infrastructure) with high minimums, while their long time horizons allow them to tolerate the illiquidity premium these assets require.

The primary role of an investment consultant retained by a foundation's board is to:

Answer: Provide investment advice, manager selection guidance, and performance reporting to help fiduciaries fulfill their duties

An investment consultant advises the board or investment committee on asset allocation, manager selection, and performance evaluation, while ultimate fiduciary responsibility remains with the trustees.

In endowment performance evaluation, 'benchmarking' means:

Answer: Measuring investment returns against a relevant market index or peer group to assess whether managers are adding value

Benchmarking compares the endowment's investment returns to appropriate market indices or peer endowments, revealing whether investment managers and strategies are generating alpha or simply tracking the market.