TOP VIEW Allocating a portion of one’s portfolio to alternatives—illiquid pools of investments such as hedge funds and private equity—has been described as the Harvard-Yale approach because it emulates the extremely successful strategies employed by the two universities in managing their endowments. While this strategy has several drawbacks—limited access to funds, tax challenges and illiquidity—it still offers returns that affluent investors find hard to ignore.

Charles Grace, the managing director of Ashbridge Investment Management in Philadelphia, says that the Harvard-Yale approach is a hot topic among families. A fifth-generation descendant of Eugene Grace, longtime chairman of Bethlehem Steel, Grace says his firm uses an open-architecture approach, working with 35 alternative-investment managers and 30 long-only managers. Aside from the Grace family, Ashbridge manages assets for 35 other clients, including families, endowments and foundations. Although each family situation is unique in the need for liquidity and income, Grace says it makes sense for families with more than $75 million to have some allocation in alternative investments.

Lack of access and increasing numbers of investors wanting to allocate to the top quartile of high-performing hedge funds have resulted in the fear among families that the alpha, or performance over an index, of each manager will drop as more hedge funds open to meet the demand. "Clearly, there are more managers in the alternative-investment space," Grace says. "But I can’t imagine the talent pool has grown as much as the demand."

Cammilleri says his family opts for funds of funds instead of individual hedge funds, but he feels constrained by the offerings that are available to them. "Only a few are exceptional, and so of course everyone wants in," he says. In response, firms like Spruce are creating internal funds in which their clients become limited partners. This strategy allows more families to band together. "They’re trying to creatively get around the problem we’ve all been complaining about, where a fund will offer only one slot, or a minimum of $10 million," Cammilleri says.

When Cammilleri talks to other high-net-worth families, he finds that they all have very low expectations for the public markets, he says. The allocation to long-only equities, he adds, is for the benefit of diversification, and is usually deployed through index funds with low fees. "We have the belief that we’ll get our outperformance through alternatives."

Liquidity and Taxes
Orbach believes that the lack of liquidity is another major drawback to the Harvard-Yale approach for individuals and families. "If you have $5 million, you can’t necessarily afford to lock up 25 percent in a 10-to-15-year project," he says.

The Grace family has invested in hedge funds for 10 years and in private equity for almost 30. Grace says they have allocated nothing to bonds for 30 years, but feels they’ve achieved the diversification they need within traditional equities, absolute-return funds and private equity. Approximately 30 percent of the portfolio is in alternative investments. "Clearly that’s not for everyone, but we feel comfortable that over certain time periods we can meet our income requirements," he says. That’s important for families to consider, Grace adds, because allocations to alternative investments are typically illiquid for a number of years, and some families require ready access to cash.