Before the 1980s, institutional portfolios looked pretty similar. Pensions, endowments, and insurers leaned heavily on public equities and bonds. Alternatives like venture capital, private equity, hedge funds, or timberland were curiosities, not core holdings. But that changed when David Swensen took over Yale’s endowment in 1985.
At the time, the endowment only supported 10% ($46MN) of the university’s operating budget, and relying on the standard 60/40 split wasn’t going to deliver the growth needed to fund operations in perpetuity. His solution became known as the endowment model.
The what model?
Swensen’s philosophy was straightforward but radical at the time:
Embrace illiquidity. Long-term investors like endowments don’t need daily liquidity, so why limit themselves to public markets? Private equity, venture capital, and real assets could offer higher returns for those willing to lock up capital.
Diversify intelligently. Instead of relying on two or three asset classes, build portfolios that spread risk across equities, fixed income, hedge funds, private markets, and real assets.
Prioritize inefficiencies. Active management can add value in less efficient markets (like venture and private equity) but is less likely to in highly liquid, efficient markets.
Why It’s So Influential
The simple answer is that the model worked. Today, 34% (2.06BN) of the University’s operating budget is supported by endowment income. Under Swensen’s stewardship, Yale delivered compounded double-digit returns for decades. That outperformance legitimized alternatives as a core allocation for institutional investors. Pensions, sovereign wealth funds, and family offices reshaped their portfolios around the endowment model.
The real question
While you’d be hard pressed to find an institutional allocator that hasn’t been influenced in one way or another by the model, the question becomes whether this model can persist. The sceptics argue that
Illiquidity can backfire, especially for investors with shorter time horizons, or when faced with a sudden cash crunch.
Scale matters. Yale had access to top-tier managers that aren’t open to all investors, and were able to negotiate terms.
As more capital has piled into alternatives, some argue the model is harder to replicate today.
Why It Still Matters
The endowment model wasn’t just about chasing higher returns, it was about discipline: being willing to step away from consensus and build a portfolio fit for long-term success. That mindset continues to guide allocators today. But with alternatives now sprawling across thousands of funds and strategies, the diligence challenge has only grown. The spirit of Swensen’s model of thoughtful, long-term allocation requires modern tools to cut through the noise.