Endowments eye crypto allocations amid tougher return outlook for traditional investments
TL;DR
University endowments are exploring cryptocurrency investments like bitcoin and ether ETFs as traditional assets face lower expected returns due to high valuations and crowded markets. Institutions are moving further on the risk curve to maintain sustainable payout models.
Key Takeaways
- •Endowments face weaker returns from traditional assets due to high equity valuations, tight credit spreads, and crowded private markets.
- •Lower expected returns threaten payout sustainability, pushing institutions to take more risk and experiment with new strategies.
- •Major universities like Harvard and Brown have started using bitcoin and ether ETFs as small, high-volatility satellite positions.
- •Cryptocurrency has moved from the fringe to mainstream institutional investment tools, offering potential for higher returns despite volatility.
- •The broader challenge involves managing expectations across all asset classes amid compressed returns and macroeconomic uncertainty.
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What to know:
- Endowments and foundations are preparing for weaker returns from traditional assets as high equity valuations, tight credit spreads and crowded private markets limit opportunities.
- Investment chiefs say lower expected returns threaten the sustainability of payout models, pushing institutions to move further out on the risk curve and experiment with new strategies.
- Some major universities, including Harvard and Brown, have begun using bitcoin and ether ETFs as small, high-volatility satellite positions, signaling that digital assets have entered the mainstream institutional toolkit.
- Endowments and foundations are preparing for weaker returns from traditional assets as high equity valuations, tight credit spreads and crowded private markets limit opportunities.
- Investment chiefs say lower expected returns threaten the sustainability of payout models, pushing institutions to move further out on the risk curve and experiment with new strategies.
- Some major universities, including Harvard and Brown, have begun using bitcoin and ether ETFs as small, high-volatility satellite positions, signaling that digital assets have entered the mainstream institutional toolkit.
MIAMI BEACH — Endowments are rethinking where they invest as they brace for weaker returns from traditional assets.
At the iConnections conference on Tuesday, several chief investment officers said the playbook that drove gains over the past decade may not work as well in the next one. Equity valuations remain high, credit spreads are near historic lows, and private markets are crowded, leaving little room for error.
“I think in general, our expectations are that for all of the traditional asset classes that we've invested in, we sort of believe this is both return compression and probably Alpha compression,” said Kim Lew, CEO and president of Columbia Investment Management Company.
Lower expected returns create a math problem. Private foundations, for example, must pay out about 5% of assets each year. Add operating costs, and the hurdle rate climbs. “If you don't earn returns of 8% the model doesn't work,” said Carlos Rangel of the W.K. Kellogg Foundation, one of the largest U.S. philanthropic foundations in the U.S.
That pressure is pushing investment teams to search further afield. Lew said generating outperformance may require going “a little bit further on the risk curve” and exploring strategies they have not used before.
That search has, in some cases, led endowments into cryptocurrency markets, which were once viewed as too volatile or operationally complex for traditional institutions. Early university investors such as Yale and Harvard backed crypto-focused venture funds years ago, gaining indirect exposure to digital assets through private vehicles. More recently, the approval of spot bitcoin BTC$68,617.09 and ether (ETH) exchange-traded funds in the U.S. has offered a simpler route.
Harvard University and Brown University, for example, have disclosed positions in both bitcoin and ether ETFs in their latest 13F filings. While the allocations appear small relative to their overall portfolios, the disclosures show how digital assets have moved from the fringe of institutional finance into the mainstream toolkit.
For endowments facing lower expected returns from stocks and bonds, crypto ETFs can serve as a high-risk, high-volatility satellite position.
Still, panelists made clear that the broader challenge extends beyond any single asset class. Many institutions are tempering expectations after years of strong market performance. Equity risk premiums look thin, private markets hold record amounts of unsold assets and macro uncertainty remains elevated.
“I think it's a really hard setup for outstanding returns,” Lew said.
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