The latest university endowment return data dribbling out for the fiscal year ended June 30 is not pretty.

Earlier return estimates of 8.7% for the Ivy League were too optimistic. Harvard’s endowment gained 6.5%, while Yale’s had an increase of just 5.7%; the University of Pennsylvania endowment gained 6.5%; Dartmouth yielded 7.5%; Brown, the smallest of the Ivy endowments at $4 billion, was a performance outlier at 12.4% (Princeton, Cornell and Columbia have yet to report). Other notable endowment returns include Massachusetts Institute of Technology at 8.8%, Stanford at 6.5% and Duke at 6.9%.

During the same time period, investors in the Standard & Poor's 500 Index had total returns, which includes dividends, of 10.4%; a portfolio of 60% stocks and 40% bonds returned 9.9%. This underperformance is consistent with the record of the past decade, with none of the Ivy endowments beating a 60-40 portfolio in the 2008-2018 period, though a couple did come close.

The biggest contributors to the weak performance of endowments were high exposure to hedge funds (2019 returns = 1.1%) and natural resources (2019 returns = -6.8%), while many endowments’ high operating costs also acted as a drag on returns.

Many endowments have cut back their exposure to hedge funds, only to find a new object of affection: private equity. That seems to be an odd choice, given the similarly high cost structure, illiquidity and returns that may well lag behind the broader market.

There has been some notable skepticism about private equity’s accounting methodologies: Numerous analyses and studies have concluded that private equity overstates its returns by as much 50%. None other than Warren Buffett observed: “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest.”

Perhaps the most detailed critique of private equity comes from a former private equity analyst. Daniel Rasmussen, formerly of Bain Capital, now founding partner of Verdad Advisers, assembles his own empirical research and found that “private-equity returns are trailing public indexes,” with “far more volatility” than many big investors believe. Claims of improved efficiencies at private-equity takeover targets are “largely illusory,” he said. He warned that many investors are overpaying for private equity.

Furthermore, Rasmussen says that investors in private equity are much too optimistic:

94% of institutional investors expect private equity to outperform public markets; 23% expect PE to outperform by 4% per year or more. This is an astonishing degree of consensus from the most sophisticated investors in the world.  Great mispricings require highly correlated beliefs on the part of investors, and what we have today in private equity is the greatest of consensuses . . . But what's even more frightening than the degree of consensus about returns is the lack of understanding of the risks.

In the same report, Rasmussen found other examples of groupthink:

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