Key Takeaways
- • U.S. college endowments have collectively invested over $130 billion in hedge funds, making universities and their public pension counterparts among the largest capital sources fueling the hedge fund industry and billionaire manager compensation.
- • Penn State's endowment invested $50 million in Pershing Square Capital (Bill Ackman's fund) in summer 2015, which subsequently lost 16.6% in 2015 and 10.2% in 2016, reducing the $50 million position to approximately $38 million by mid-2017 before accounting for annual fees of roughly 1.5%.
- • Hedge fund fee structures—including management fees and performance fees collected by fund managers and intermediaries—substantially erode endowment returns; analysis suggests pensions and endowments could have achieved better performance in cash instruments than in hedge funds when fees are factored in.
- • Yale's $26 billion endowment generated $480 million in compensation for hedge fund managers in 2014 alone, while allocating only $170 million to direct student and faculty spending that same year, illustrating the scale of capital flowing to alternative asset managers.
- • College endowments with aggressive allocation strategies toward alternative assets (hedge funds, private equity, commodities) have historically outperformed more conservative endowments, though recent performance has not met long-term expectations, particularly given fee drag.
Summary
Public pension funds and college endowments have emerged as primary capital sources for the hedge fund industry, collectively deploying over $130 billion into these alternative investment vehicles. This institutional capital concentration has directly enriched hedge fund managers, many of whom have become billionaires, while creating a complex fee structure that filters public money through multiple intermediaries—each collecting fees—before capital reaches hedge fund operators.
The Penn State endowment's $50 million investment in Pershing Square Capital, made in summer 2015, serves as a concrete case study of this dynamic. The endowment committed capital to Bill Ackman's flagship hedge fund during a period of strong historical performance. However, subsequent returns proved disappointing. Pershing Square International reported a loss of 16.6% in 2015 and 10.2% in 2016, with gains of only 1.83% through mid-June 2017. At these rates, Penn State's $50 million position had depreciated to approximately $38 million by mid-2017, exclusive of annual management fees of approximately 1.5% (roughly $750,000 annually on the initial investment). While Penn State's $3.6 billion endowment is substantial, this investment exemplifies the performance challenges facing institutional allocators.
Fee structures present a systemic headwind for endowment returns. Middlemen, funds of funds, and hedge fund managers collectively extract significant fees, and analysis suggests that pension funds and endowments could have achieved superior risk-adjusted returns by investing in cash instruments, given the cumulative fee burden. Yale's experience illustrates the scale: in 2014 alone, the university's $26 billion endowment generated $480 million in compensation for hedge fund managers while allocating only $170 million to direct institutional spending on students, faculty, and staff.
Historically, university endowments pursuing aggressive allocation strategies toward alternative assets—including hedge funds, private equity, and commodities—outperformed more conservative peers. However, recent performance has disappointed relative to long-term expectations and fee levels. The Penn State-Pershing Square situation marks a broader inflection point for the hedge fund industry, as institutional capital providers increasingly scrutinize returns net of fees and reassess the trade-offs between hedge fund allocations and alternative deployment strategies.
The Penn State endowment's $50 million investment in Pershing Square Capital, made in summer 2015, serves as a concrete case study of this dynamic. The endowment committed capital to Bill Ackman's flagship hedge fund during a period of strong historical performance. However, subsequent returns proved disappointing. Pershing Square International reported a loss of 16.6% in 2015 and 10.2% in 2016, with gains of only 1.83% through mid-June 2017. At these rates, Penn State's $50 million position had depreciated to approximately $38 million by mid-2017, exclusive of annual management fees of approximately 1.5% (roughly $750,000 annually on the initial investment). While Penn State's $3.6 billion endowment is substantial, this investment exemplifies the performance challenges facing institutional allocators.
Fee structures present a systemic headwind for endowment returns. Middlemen, funds of funds, and hedge fund managers collectively extract significant fees, and analysis suggests that pension funds and endowments could have achieved superior risk-adjusted returns by investing in cash instruments, given the cumulative fee burden. Yale's experience illustrates the scale: in 2014 alone, the university's $26 billion endowment generated $480 million in compensation for hedge fund managers while allocating only $170 million to direct institutional spending on students, faculty, and staff.
Historically, university endowments pursuing aggressive allocation strategies toward alternative assets—including hedge funds, private equity, and commodities—outperformed more conservative peers. However, recent performance has disappointed relative to long-term expectations and fee levels. The Penn State-Pershing Square situation marks a broader inflection point for the hedge fund industry, as institutional capital providers increasingly scrutinize returns net of fees and reassess the trade-offs between hedge fund allocations and alternative deployment strategies.
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