How One Man Grew Yale's Endowment From $1 Billion to $30 Billion

To Investors,

By chance I came across some lessons about how the Yale Endowment grew from $1 billion to $30 billion between 1985 and 2021. The architect of that achievement was a guy called David Swensen, who was the Yale endowment’s chief investment officer in that period. His strategy for running the Yale endowment is referred to by capital allocators as a case study called the Yale Endowment Asset Allocation Model. Now I nerd-out about this kind of stuff all of the time so I wanted to share what I learned in today's brief letter, because I think capital allocators can take away a lot that will help them manage and grow their own portfolios.

The secret to Swensen’s success was that he moved away from the traditional portfolio allocation strategy of 40% bonds and 60% public market equities, and favoured more risk-taking by allocating capital to alternative investments like private equity, hedge funds, and real assets. At its core, the Yale Model is about allocating capital across a wide range of asset classes to maximise returns while controlling risk.

Here’s what the allocation would look like:

* Domestic Equity: ~10%U.S. stocks, often via low-cost index funds.

* Foreign Equity: ~15%International stocks for global exposure.

* Fixed Income: ~5%A minimal slice for bonds and cash.

* Absolute Return: ~20%Hedge funds aiming for market-independent returns.

* Private Equity: ~25%Investments in private companies.

* Real Assets: ~15%Real estate, timber, and natural resources for inflation protection.

* Other: ~5-10%Venture capital or tactical bets.

If you look closely, up to 70% of the portfolio could be allocated towards alternative investments (hedge funds, private equity, real assets, and venture/tactical bets); which many investors would shy away from because those asset classes are illiquid. In my view, a well-managed endowment, with its perpetual time horizon and absence of redemption pressures, should allocate significantly to carefully selected illiquid assets to maximise long-term growth. Unlike traditional funds, endowments face no demands from investors to return capital, as they raise funds through donations and use only a small portion—typically 4.4% annually, as seen in Yale’s spending policy—to support university operations, such as scholarships, faculty salaries, or infrastructure upgrades. This structure allows the chief investment officer to pursue high-return, illiquid investments like private equity and real assets, which have historically outperformed public markets by 3-5% annually over decades, as evidenced by private equity’s 13.5% annualised return from 1986-2020 compared to the S&P 500’s 10.2%. Yale’s endowment, with ~25% in private equity, achieved a 13.7% annualised return from 1990-2020, far surpassing the 8.6% average for peer endowments. By balancing calculated risk with prudent oversight through diversification and top-tier manager selection, an endowment can grow substantially to secure a university’s financial future, though managers must remain vigilant of liquidity risks.

Swensen’s Yale Model worked because the strategy hinged on three core beliefs:

* Market InefficienciesPublic markets (specifically stocks and bonds) are “efficient” in the sense that prices reflect all available information, making it hard to beat the average. Alternatives, however, operate in less efficient markets. Private equity, for example, involves buying stakes in companies not traded publicly, or where the companies are still young and the public does not yet know how to value the companies correctly, so in that environment, skilled managers can spot undervalued gems. Swensen’s bet: talented managers in these spaces can generate alpha (excess returns).