The Harvard Management Company, in charge of the mighty Harvard Endowment, appears to be generating a return between 7-9% for fiscal 2008, according to sources familiar with the fund (see WSJ article). As a comparison, the S&P 500 fell about 15% during the same time frame. Performance has been good enough and long enough that other management companies are trying to mimic their returns (see previous post). One key to their performance is diversification. Harvard invests in 11 non-cash asset classes. In fact, when you look at the asset allocations, it is different from some traditional allocation benchmarks. From the WSJ:

"U.S. equities constitute 12% of the portfolio; developed foreign equities are 12% and emerging market equities are 10%. Total foreign equities account for 22% of the portfolio, up from 19% in 2007, compared with 12% domestic. Real assets, including commodities, are 33%, up from 31%. Fixed income dropped to 9% from 13%."

Can the average investor duplicate the returns of the Harvard endowment? The author of the WSJ article, James B. Steward, believes so - to some degree. Individual investors can duplicate most categories with individual stocks, sector mutual funds, and ETFs. Foreign equities and real assets are also able to be purchased, and are currently cheaper than just a few months ago, as are energy and commodity stocks and funds. The most difficult areas to duplicate are private equity and hedge fund returns. New long-short ETFs, and various hedge fund replication strategies are being considered, but making such investments is not currently as easy as in the other asset classes. Private equity is particularly troublesome. Nonetheless, and as mentioned by the author, given the current returns of private equity and hedge funds in general, lower weighting in these assets class may not be such a bad thing in the short-term - even if they did juice past returns. Maybe new products will become available before everyone jumps back on the alternative investment train.

The Swiss funds-of-funds firm Gottex Fund Management is launching a new fund that will emulate the investments and strategies of some of the larger U.S. academic endowment funds, such as those at Harvard and Princeton (see the HedgeFund.net article). The new Gottex fund will also allocate around 65% of the fund to alternative investments. Why 65%? When preparing the fund, the Gottex group found that a 65% exposure to alternative investments, when combined with traditional investments, did the best over the long-term. No indication if that means risk-adjusted or not. As for the alternative investments, everything from hedge funds, private equity, long-only equity, commodities, fixed income, real estate, and other real assets will be utilized. Given the current environment, the timing could prove advantageous. As mentioned by fund manager William Landes, "For the short-term the challenging environment for alternative products like private equity and hedge funds was where the opportunities lie. If I put my investor hat on, I would say that if I have a six to nine-month tactical horizon, global equity markets and some alternative markets are actually where I want to be.” Given the move by many academic endowments towards greater exposure to real assets, commodities, private equity, and international equities, any new fund emulating the likes of the Harvard fund may offer no other choice.