It wasn't that long ago that so-called alternative investments were all the rage among endowments as equity markets meandered in the mid-2000s and interest rates headed to zero amid the financial crisis. Private equity was one of the main beneficiaries. Bloomberg Gadfly reported that assets under management by private-equity firms ballooned from $580 billion in 2000 to $2.4 trillion by June 2015. Investors were lured by the inherent characteristics of private equity -- low correlations with equity markets, modest volatility and good performance.
However, those reasons sound remarkably similar to what was said in the past about hedge funds: Well-publicized performance led to big inflows led to underperformance led to big outflows.
In the hedge fund world, there is only so much alpha -- or market-beating returns -- to go around. There are comparable constraints on private-equity returns, driven by similar factors. It shouldn't come as a surprise that as private equity became huge, returns suffered.
University endowments have a history of plowing into asset classes late in their cycles. The planned shift by HMC might suggest private equity has peaked and become so overwhelmed with capital that performance suffers. It wouldn't be the first time.