It’s that time of year again, time to count with envy all the money made by elite university endowments.

Well actually, no, not this year. Yale’s endowment eked out a mere 3.4 percent return during the fiscal year to June – yet that was enough to make it the big winner among schools that have reported so far. Harvard’s investment portfolio fell 2 percent in fiscal year 2016, while the University of Pennsylvania’s dropped 1.4 percent.

Sure, those endowments have countless resources and connections and clever analysts, but none of that mattered. An investor armed simply with a traditional 60/40 portfolio of U.S. stocks and bonds would have enjoyed a 4.8 percent return over the same period (those are returns for the S&P 500 and the Barclays U.S. Aggregate Bond Index, including dividends), easily beating Yale’s peer-best return.

Granted, it’s only one year, but what happened?

One word: alternatives. Investments that delivered outsized returns to elite endowments for decades – big bets on things like hedge funds and private assets – have let them down in recent years, and 2015/2016 was no exception.

Nearly three-quarters of Yale’s portfolio is in hedge funds and private investments in venture capital, leveraged buyouts, real estate and real assets. Almost 60 percent of Harvard’s portfolio is similarly invested.

Harvard’s alternatives performance last year is indicative: Its hedge fund investments fell 1.2 percent; real assets tumbled 10.2 percent (caused in part by energy’s spectacular collapse). Private equity returned 2.6 percent. This is all part of a worrying trend for alternatives. Hedge funds’ rolling ten-year returns have declined since 1999, while those for private equity have trended down for at least that long.

Given their vast fortunes, elite university endowments will no doubt be just fine. But what about all those smaller institutions – and individuals– who imitate endowments by chasing alternatives? What should they think?

Unhelpfully, there are good reasons to be both bearish and bullish about alternatives. The bear case is widely understood. There’s too much money chasing alternatives: nearly $3 trillion in hedge funds and $2.4 trillion in private equity. That will eventually drag down the performance of any strategy.

Yet there are three reasons why the future could be brighter. First, mean reversion is a powerful force. There's lots of research showing asset prices tend to be cyclical. Alternatives’ recent struggles, in other words, may point to stronger, not weaker returns ahead.

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