Endowments Should Prepare for Risks of Deflation
|Apr 4th, 2012 | Filed under: Alpha Strategies, Endowments & Foundations, Institutional Investing, Risk management, Timely Research, Today's Post | By: cfaille||
Mark Schimd, the chief investment officer at the University of Chicago, and Que Nguyen, managing director of strategy there, have written a wide-ranging paper that begins with the challenges at the University of Chicago’s fund and its commitments, but that has broad implications. Their paper is the result of an initiative begun in early 2010, known as Total Enterprise Asset Management (TEAM).
That acronym was chosen because the goal of the TEAM was to marry the operational side, the day-to-day liabilities, of the university with the endowment side. College endowments, like pensions, preserve a long-term outlook as to their portfolio, but as parts of a team they should also be aware of the volatility to which a university is subject in its day-to-day operations.
Restoring Risk Management
Traditionally, the endowment model has involved holding illiquid assets, and benefiting from the premiums that markets pay institutions with a tolerance for illiquidity. Further, this self-image of endowments as buy-and-hold institutions leads to a de-emphasis of risk management, in the expectation that near term zigs and zags will level out nicely if given enough time. Schmid and Nguyen break with this model. They say, “While we continue to pursue strong returns, we must do so without taking on excessive risk to the University.”
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Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."
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