The Second Largest Endowment in America: Yale University and Its Alternative Investment Strategy

Regarding endowments, Yale University, situated in Connecticut and renowned for its educational facilities, alumni, and rich history, is the second largest endowment in the United States, behind Harvard University. With a valuation of over $40 billion, it is a useful case study of how a diversified investment portfolio, which includes several investments in real estate opportunities, can fund its mission for years to come.

The endowment’s true impact might begin with the generosity of generations of alumni and friends in the national and international community who trust Yale’s goals and ideals. However, trust can only get one so far; sometimes, more ambition is required. This is why Yale has an investment strategy to build its earnings year-over-year, created with discipline, finesse, and a host of expert minds working diligently to keep it going.

Approximately 90% of the endowment is invested in assets, which can yield a marked increase in equity for continued use and expansion. This includes between 9% and 11% invested in real estate, which bears little resemblance to stocks or bonds. This is because its increase and decrease in value are counted behind the market rather than fluctuate with it. Yale’s endowment can reliably count on healthy returns and generous tax advantages by carefully selecting what types of real estate to invest in. In other words, equity that Yale can then use to further its goals and ambitions.

Investing in real estate is playing the long game. Long-term benefits come from long-term investments, so Yale’s model is not for the faint of heart. While it has been criticized for shunning stocks, especially when the market performs strongly, its dedication to these alternative investment methods has netted its continued success year after year. By utilizing this diverse portfolio investment strategy, Yale buffers itself against the risks born by public markets. Stocks and bonds fluctuate daily, with public faith acting as the chief arbiter of whether they rise or fall. In contrast, real estate is an asset that can increase its value in tandem with the market and through investor intervention. On a smaller scale, those who invest in real estate can improve the appeal of these assets through relatively low-cost measures, thereby increasing their real value, tax benefits, and even cash flow under certain circumstances.

In 1985, Yale allocated around 11% of its endowment towards alternative asset classes. During that period, Yale faced a 10% chance of their spending being disrupted – which meant a real spending drop of 10% over the next two years, while the worst simulations portended a potential drop of 20%. This, in turn, was predicted to lead to a drop in the endowment’s value by 50% over the next half-century. By 2019, when 77% of the endowment was made up of various alternative assets, the potential disruption had dropped to 5%, with the worst simulations bordering on 12%. With the endowment having a value of $1.3 billion in 1985 and over $30 billion in 2019, that drop would suddenly have become massive if no changes had been made. As of 2024, Yale has only broadened its horizons in alternative investment strategies.