Blog Article | Thomas Lee
Posted: October 29, 2018

Yale University’s move into cryptocurrencies signals institutional shift toward asset class

Warren Buffett of Berkshire Hathaway really doesn“t like cryptocurrencies. The Warren Buffett of Yale University clearly believes the opposite.

The venerable Ivy League institution is reportedly investing in two Silicon Valley venture funds that focus on cryptocurrencies and Blockchain technologies. The move is led by David Swensen, whom people often compared to Buffett because of his enormous success managing Yale“s famed $27 billion endowment fund.

Over the years, university endowments have copied Swensen“s famed “Yale Model,” which devotes a considerable portion of the school“s investment portfolio to alternative assets, including venture capital, private equity, and hedge funds. So Swensen“s move into cryptocurrencies will likely push university endowments and other large institutional investors towards this emerging asset class.

Yale“s decision might seem oddly timed since cryptocurrencies, especially Bitcoin, have mightily struggled this year. But university endowments, like mutual funds, are hardly short-term investors.

“By making this investment, Yale is acknowledging that crypto is not a fad – that the asset is likely to generate long term value,” said Maureen Downey, a managing director and portfolio manager for SP Investments Management who oversees new product development.

And if anyone knows Swensen, the move into a high-risk asset like cryptocurrencies is highly consistent with his record.

The Yale Model bears fruit

Swensen joined Yale in 1985, having been a senior vice president of Lehman Brothers. As chief investment officer for the university, Swensen pioneered the Yale Model, which emphasized a heavy focus on less liquid/high risk assets like private equity, venture capital, and credit.

At the time, Swensen“s strategy ran counter to the relatively conservative investment philosophies of university endowments. But his results soon attracted widespread notice.

As of June 2016, Yale generated a 15 year and 20-year annual returns of 10.2 percent and 13.7 percent respectively compared to 8.8 percent and 11.2 percent for the country“s top 5 endowments. The average U.S. endowment fund returned 5.2 percent and 6.8 percent during this period.

The average U.S. endowment fund now devotes more than 30 percent of assets towards alternative strategies; endowment funds with more than a $1 billion directs about 40 percent to these assets.

In many ways, Swensen helped create unicorns, late stage venture backed growth firms worth at least $1 billion. Given the zero to near zero interest rate environment that has marked the U.S. economy since the Great Recession, institutional investors like mutual funds, endowments, and pension funds seeking higher returns than cash and bonds have poured money into venture capital and other private assets. The influx of capital has resulted in big valuations for pre-IPO tech firms like Uber, Airbnb, and Lyft.

Major university endowments are able to absorb risk because of their large sizes and long-term investment approach.

“The top 5 endowments have consistently achieved attractive returns with moderate volatility due to their multi-asset approach to investing, their strategic approach to asset allocation, and their significant exposure to alternative asset classes,” according to a report by Chartered Alternative Investment Analyst Association.

“While the financial crisis of 2008 negatively impacted the performance (of funds), their long-term investment strategy has prevailed to the extent that the long-term total and risk-adjusted returns remain superior to those of traditional portfolios,” the report said.

A thoughtful approach to crypto

Last year, Yale and Princeton“s endowments, with a heavy focus on alternative assets like private equity, real estate, and venture capital, were actually outperformed by Ivy League peers with allocations weighed toward U.S. equities, according to a paper by MPI Research. That“s not too surprising, given the strong performance U.S. stocks.

But experts think the U.S. equities market, which has enjoyed a 9-year bull run, is due for a major correction. That makes Yale“s decision to enter cryptocurrencies even more notable, perhaps as a possible long-term hedge against overvalued stocks facing an inevitable turnabout.

Yale is also not blindly rushing into cryptocurrencies. Rather than directly invest in this space, the school is backing a16 crypto, a $300 million venture fund by Andreesen Horowitz, and Paradigm, a $400 million fund founded by former Sequoia Capital partner Matt Huang and Coinbase co-founder Fred Ehrsam.

“Yale is a very smart investor in alternative assets but it is adopting a diversification strategy by going through these funds,” Downey of SP Investments Management said. “The endowment is acknowledging the need for smart minds and expertise in a space that is rapidly evolving.”

Indeed, Katie Haun, one of Andreesen Horowitz“s newest general partners, is helping lead a16 crypto. What makes Huan so interesting is that she“s not a traditional venture capitalist. Instead, Haun is a career federal prosecutor where she focused on cyber crime and fraud. She created the government“s first cryptocurrency task force and led investigations into the Mt. Gox hack and the corrupt agents on the Silk Road task force.

So rather than exclusively focus on the technology behind cryptocurrencies and Blockchain, the fund has recruited someone with expertise in an area that could destroy investor confidence in these emerging assets.

Though Yale“s entrance into cryptocurrencies is attracting notice, the university is just continuing the strategy that has made its endowment so successful over three decades. And as we“ve seen before, where Yale goes, others follow.



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Thomas Lee
Article Author

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.

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DISCLAIMER: This blog does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The information contained in this blog has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

None of the information contained in this blog represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Copyright © SharesPost, Inc. 2018. All rights reserved.

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