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An alternative proposal to the Yale endowment model
ETF Securities Asset Allocation Research An alternative proposal to the Yale endowment model
Summary
Over the past 60 years, portfolio management has significantly gained in complexity and sophistication with active funds such as the Yale endowment fund not always outperforming a passive index tracking strategy.
Nowadays, it is possible to construct an equivalent strategy to the Yale model that is more transparent, more liquid, passively managed and cheaper to implement.
Adding precious metals to this alternative model improves return by 19% and enhances the Sharpe ratio by 46%.
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Early stage of portfolio construction
Since 1950, portfolio construction has been through 3 distinct phases1 and is in what looks like its fourth phase since the global financial crisis in 2008.
1 Increasing Institutional Portfolio Complexity and the Resulting Shift from a Product to a Solutions Mindset – Citi Business Advisory Services
The first phase ran from the early 1950’s to mid-1990. Rather than holding 100% in equities or bonds, investors searched for an optimal mix to diversify their portfolio risk. Based on the Modern Portfolio Theory, the generally accepted rule of thumb for optimal weights were 60% equities and 40% bonds.
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Over the past 10 years, the 60/40 model has provided a Sharpe ratio of 0.435, more than twice higher than the Sharpe ratio of a global equity index thanks to the lower volatility of the 60/40 benchmark of 9.7% compared to 16.9% for the MSCI World.
In 2000, the Yale University Investments Office promoted the idea that investors should diversify in asset classes other than equities and bonds. Alternative assets such as private equity or hedge funds have higher return potential and diversification power as they are less liquid, therefore less volatile and less subject to strong correction. The outperformance of the Yale fund made the model popular among institutional investors.
Active versus passive portfolio management
The Yale endowment fund was created to provide support to the operating budget of the university scholars. Actively managed, the fund has progressively increased its exposure to alternative assets from 15% in 1950 to more than 75% today. As of June 2014, the fund was holding 15.4% in equities, 8.4% in bonds and cash and 76.2% in alternative assets: private equity (33%), hedge funds (17.4%) and real assets (25.8%).
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Over the past 10 years to June 2015, the fund returned 10% per year compared to 7% for the 60/40 benchmark. It is worth noting that the fund did worse than the benchmark during the financial crisis in the year to June 2009. The fund target weights for 2016 are more or less the same as in 2014: 18.5% in equities, 8.5% in bonds and cash and 73% in alternative assets.
Low risk investors such as pension funds may however see the Yale model as too aggressive, refrained by the cost to replicate such an illiquid portfolio. Compared to endowment funds, pension funds have a larger investment pool and a shorter investment horizon to generate income for their clients.
Alternatives to the Yale endowment model
Because the Yale endowment fund is actively managed and invested in funds that are not listed on exchanges, the model is not replicable. Based on the same concept, we constructed an alternative portfolio with 20% equities, 5% bonds and 75% in alternative liquid assets. The 75% is equally allocated to private equity, hedge funds and real estate.
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Since March 2005, the alternative portfolio returned 8% per year on average, 39% above the 60/40 benchmark over the same period. It is interesting to note that adding a basket of precious metals into the alternative portfolio increases the portfolio return by 19% to 9.5%. The addition of the precious metals basket also enhances the alternative portfolio risk/return profile as the Sharpe ratio of the portfolio increases to 0.524 from 0.359 without precious metals.
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Low risk investors may find a core/satellite portfolio more appealing. We illustrate that a core/satellite strategy which holds 70% in core assets such as the 60/40 benchmark and 30% in alternative assets as a satellite provides an annual return of 7.4% comparable to the alternative portfolio which provides a return of 8%. The volatility of the core/satellite strategy is however much lower than the volatility of both alternative portfolios, enhancing the portfolio Sharpe ratio to 0.525. The 30% in the satellite are equally allocated to private equity, hedge funds, real estate and a basket of precious metals.
The new generation of portfolio models
The global financial crisis in 2008 drastically changed investor behaviour and portfolio management. Prior to the crisis, while investors were increasing their portfolio diversification toward alternative assets, they also concentrated their risk exposure toward equity risk essentially and saw their returns plummet as the financial market collapsed. The Yale endowment fund fell 24.6% in the year to June 2009 while the alternative portfolio fell 19.8% (with precious metals) and the 60/40 benchmark was down 12%. The real added-value of active diversification across asset classes is therefore questioned.
New types of portfolio management have emerged since and among them is the concept of diversification across risk factors, known as smart beta. Instead of using a classification by asset class, securities are classified by risk exposure. Two securities can then provide diversification despite being part of the same asset class as long as they are not exposed to the same risk.
Our proprietary contrarian model2 discussed in our previous note is a long only portfolio of commodities that takes a smart approach to traditional allocation strategies with commodities. The smart beta commodity portfolio has returned twice the annual return of the Yale fund over the past ten years to June 2015 while the alternative portfolio with precious metals has outperformed the fund by 11% over the same period.
2 How to make the best of commodities: the contrarian model – ETF Securities (02 February 2016)
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In this note, we have shown that it is possible to construct an alternative portfolio that outperforms the Yale endowment fund when adding a basket of precious metals. As opposed to the Yale endowment fund, the alternative portfolio with precious metals is passively managed, more liquid and more transparent. Adding precious metals to the alternative portfolio improves the portfolio return and enhances its Sharpe ratio. Over the past sixty years, portfolio management has significantly gained in complexity and sophistication. Managers need to find innovative and cost efficient solutions that truly diversify investors’ portfolio risk. Portfolio allocation shifts from being asset class based to risk factor based and from active to passive management. The real added-value of active funds over passive funds continues to be debated.
Portfolio performance
This table shows how the different portfolios studied in the current and previous asset allocation notes have recently performed. In each section, the assets or portfolios are benchmarked against the portfolio in bold.
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Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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