The Yale Model for Individual Investors

A new strategy called "endowment in a box" has been attracting individual investors who want a diversified asset allocation that is predominantly in alternative investment.  It is based on the Yale model made famous by David Swensen at Yale and Jack Meyer at Harvard.  The strategy invests in equities and fixed income securities from around the world and has a high allocation to hedge funds, private equity, real estate and commodities.  Some of the more well known managers are HighVista Strategies, Makena Capital Management and Morgan Creek Capital Management.  I was privileged enough to hear Mark Yusko, CEO and Chief Investment Officer of Morgan Creek, speak at the Hedge Fund Roundtable last year.  Their goal is to have high returns with the least risk possible.

The article provided an inside look at HighVista Strategies which is run by Andre Perold, a former professor at Harvard Business School, Brian Chu, Jesse Barnes and Raphael Schorr.  It has $3.6 billion in assets under management.  It has outperformed the Standard & Poor's 500 index by 15.3% for the period between October 2005 to June 2012.  Dr. Perold has two main tenets:  don't lose a lot of money and get the highest returns.  HighVista invests in the top managers and uses index funds to balance their asset allocation.  56% of the portfolio is in hedge funds and private equity.  The remainder is in cash, global stock indices and bonds.  They are invested in 75 fund managers such as Convexity Capital (fixed income hedge fund), Berkshire Partners (private equity fund) and Xander Group (emerging markets hedge fund).  Another alternative holding is catastrophe bonds that pay off when there is a natural disaster such as a hurricane or earthquake.  For the traditional assets, the rule is:  the higher the risk; the higher the cash allocation.  The equities allocation is based on the VIX index which measures the option market's assessment of future volatility in the S&P 500 index.  The higher the VIX; the lower the equities holdings.

The article from Barron's can be accessed here.