What is the Endowment Model?
The Endowment Model was adopted by David Swensen when he was Chief Investment Officer at Yale University. The model relies on building a diversified portfolio of investments with low correlation to minimize risk and optimize returns, and an asset allocation that favors asset classes with high expected returns and avoids those with low expected returns regardless of liquidity. This tends to favor private investments due to their illiquidity premium against fixed income and commodities. Investments may still include publicly traded stocks and bonds, but the lion’s share would be in private market assets, such as hedge funds and private equity.
To reduce correlation and protect against market volatility, diversification under the Endowment Model would frequently extend across geographies, sectors and asset classes, thus curbing losses should one market underperform or plummet.
What Are the Benefits of the Endowment Model?
The Endowment Index (ENDOW) created by Nasdaq OMX in 2018[1] has outperformed both the traditional tactical asset allocation model and the 60/40 global balanced model[2] over the long run. This performance is driven by five core principles:
1- Long-Term Orientation: A long-term investment horizon is one of the defining characteristics of the Endowment Model. By avoiding short-term market reactions, endowments are able to weather economic downturns and benefit from subsequent recoveries. For example, during the 2008 global financial crisis, Yale’s endowment maintained its long-term positions rather than selling at a loss and subsequently benefited from the recovery.
As David Swensen explained in Pioneering Portfolio Management[3], fiduciaries must accept the possibility of short-term underperformance in order to capture long-term investment opportunities.
2- Focus on High-Return Assets (Illiquidity Premium): The model allocates heavily toward private market assets such as private equity, venture capital, and real estate, which are historically associated with higher returns due to their illiquidity premium. Unlike bonds or publicly traded stocks, these assets are less liquid but offer better compensation for the risk of tying up capital.
For instance, private equity has historically delivered stronger returns than public equities over long time horizons. As McKinsey notes in its 2024 Global Private Markets Review, the buyout segment has historically delivered higher returns than public markets over both 10- and 25-year periods, which is a key reason why investors continue to allocate to the asset class.[4]
Yale has progressively shifted its allocation toward alternatives, with over half of its endowment invested in private equity and venture capital by 2020.[5] This significant allocation reflects the model’s commitment to seeking long-term value in less liquid investments.
3- Diversification: Endowments diversify not only across asset classes but also geographically and by strategy. A well-constructed portfolio under the Endowment Model might include U.S. and international equities, private equity, real estate, hedge funds, infrastructure, and natural resources.
This broad diversification reduces the portfolio’s dependence on any single asset class or region. Research from the CFA Institute shows that diversified portfolios tend to have lower volatility and higher risk-adjusted returns over time compared to more concentrated allocations like the traditional 60/40 model.[6]
4- Pursue Illiquid Opportunities: Illiquid markets are often less efficient, offering investors with the right expertise a chance to generate higher alpha. Endowments capitalize on this by investing in niche and emerging areas such as venture capital, distressed assets, and infrastructure.
These opportunities may not be readily available to the average investor but can offer meaningful upside potential when identified and selected carefully. The model assumes that accepting a longer lock-up period can unlock returns unavailable in more liquid, efficient markets.
5- Manager Selection: This is critical to the success of the Endowment Model. Top-performing endowments consistently partner with highly skilled investment managers, particularly in private markets, where returns can vary widely between top- and bottom-quartile managers.
Yale’s endowment is a prime example, having consistently selected top-tier private equity and hedge fund managers, significantly boosting its long-term returns. This approach reflects a belief that in less efficient markets, manager skill has a substantial impact on outcomes.
The Family Office shares this philosophy, recognizing that access to top-tier managers and strategic partnerships can add meaningful value to a portfolio, especially for investors looking to replicate institutional-grade strategies.
The Family Office and the Endowment Model
As a leading wealth manager in the Gulf region, we use our global network of partners and decades of experience to build diversified portfolios in private market opportunities. By applying the Endowment Model, we advise our clients to reduce risk through diversification by geography, sector and asset classes. We also favor a long-time approach and compounding returns for optimal returns.
Deeply rooted in the region, we understand the goals and objectives of Gulf investors. Contact our financial advisors to help you build a robust portfolio to preserve your family wealth for generations to come, or use our investment portfolio builder tool today to get started.
