Is the Endowment Model Broken? - Conservative model

Of the past 11 trading days, 10 (including today) have had triple digit moves, making this one of the most volatile times in history for the market. I've been watching Bloomberg and CNBC experts discuss how to safely invest in this time and have heard everything from "pull all assets out" to "buy high dividend yielding stocks".

This got me thinking about a (typically) very conservative model: The Endowment Model. Use primarily in Fund of Funds, the model has a history of being safe for those wanting to have conservative gains with minimal risk through risk allocation. Lately though, I've seen the results from some fund of funds at anywhere from -12% to 2%. It's bad when a 2% gain is putting you in the top echelon of firms.

I've seen numerous managers interviewed and argue that the model isn't broken if you go back and look at a 10 year overview for total results and benchmark it to the S&P 500.

Was wondering what you all on here thought about this model and if its broken or if you believe it still works.

Hedge Fund Interview Course

  • 814 questions across 165 hedge funds. Crowdsourced from over 500,000 members.
  • 11 Detailed Sample Pitches and 10+ hours of video.
  • Trusted by over 1,000 aspiring hedge fund professionals just like you.

Comments (4)

Oct 10, 2011

I don't know, but this is something I'm interested in knowing more about. Hedging strategies seem to be another big factor with performance that probably has some relevance in examining whether or not the fof model still works. My first reaction to this post is that it's the hedging that's out of control now, not necessarily the basic setup of endowments.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Oct 10, 2011

I guess performance is really based on asset allocation for the portfolios. The model itself is split into an Alpha Core and Swing Assets categorized by the following:

Alpha Core is made up of:
Hedge Fund
Private Equity
International Bonds
International Equity
Real Estate
Venture Capital
Commodities
REITs

Swing Assets are made up of:
US Dollar
US Equities
US Commodies

The idea is you build your Alpha Core according to how much base risk you want to have and add swing assets to mitigate that risk. Obviously different clients are wanting to take different levels of risk so no 2 portfolios will be the same.

Oct 10, 2011

all models come pre-broken with a 100% frustration guarantee.

I have to return some video tapes.

Oct 10, 2011