Grace says some families just don’t have the time. "The time
horizon for Harvard and Yale may not be infinite, but it’s probably longer than
a family’s," he says. "Families may be attracted to the risk reward, but some of
the consequences may restrain their desire to have such a large proportion in
alternatives."
For a family with $1 billion in assets, Grace says, a 30 percent
allocation into alternatives may be fine, but for one with only $10 million,
that 30 percent could be constraining.
Taxes on short-term gains and high management fees for hedge funds
are another part of the consideration for families. Harvard and Yale are
tax-exempt and large enough to negotiate fees to the point that families cannot,
Grace says. Even making the transition from traditional stocks to alternatives
means taking a hit, if a family sells low-basis stock to invest in a hedge
fund.
"Hedge funds are notoriously tax-inefficient because of the high
turnover," says Orbach. "But taxes are simply input into the equation. Is the
Harvard-Yale approach still justified after fees and taxes? The answer is
yes."
Despite the approach’s drawbacks, the rewards are greater for
families who can afford to allocate a percentage of their portfolio to
alternatives, Orbach says; he believes the thinking among families is moving
toward a consensus on absolute-return strategies. "We are standing on the
shoulders of many people before us," he says. "All we are trying to do is
create the most sophisticated platform, and harness platforms that have already
been developed. At the end of the day, the argument for the approach still
stands."
Judy Martel is a certified financial planner and the author of the
book The Dilemmas of Family Wealth:
Insights on Succession, Cohesion and Legacy.
Harvard’s and Yale’s investment
performances over 10 and 20 years show double-digit returns well above those of
traditional portfolios. Using what he calls Harvard-Yale–style blends—portfolios
with the same hefty allocations to absolute-return hedge funds, long-short
equity hedge funds, private equity and real assets—Gil Orbach, the chief
investment officer at Spruce Private Investors, compared the blend’s results to
a diversified long-only blend and the Russell 3000 index. Over 15 years
annualized, the Yale-style blend returned 12.9 percent; the Harvard-style blend,
12.1 percent; long-only, 8.5 percent; and Russell 3000, 11 percent. Orbach says
that because investors do not have access to Harvard’s and Yale’s actual
performance numbers, a relevant comparison is made using market indexes for
traditional asset classes and the median net peer performance of funds of funds
for alternatives.
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