Cammilleri’s father founded Joico Laboratories, a hair-products firm, and sold it in 2001 to Japanese cosmetics giant Shiseido. His parents, now in their 70s, are divorced, and the 34-year-old Cammilleri says his family is now essentially in the wealth management business. By shepherding both parents through the process of hiring wealth advisors to manage their estates, Cammilleri says he learned a great deal.

"My dad grew up in the streets, very poor," says Cammilleri, who, with the help of the family’s attorney, manages his father’s money in a traditional portfolio. "I’ve never come across anyone as conservative as my dad. He doesn’t want to take the time to figure it out; he just wants to hire someone. And he doesn’t like volatility. Lockups and lack of liquidity just scare him. He would be quite happy in all Treasurys."

His mother, who grew up on a farm in South Dakota, allocates 47 percent of her portfolio to alternative investments that include real estate and hedge funds. And therein lies the key differential in building wealth, Cammilleri believes. In the space of four years, his mother’s returns have been significantly higher than his father’s, even though their assets were equal after the divorce. "I find it interesting that my dad was in reality the wealth creator, but now my mom has a lot more than he does, and we’ve only been investing since mid-2003."

For ultrawealthy individuals and families, allocating large percentages of their portfolios to alternatives—illiquid pools of investment like private equity and hedge funds—has been described as the Harvard-Yale approach, because it emulates the extremely successful strategies used 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 investors find hard to ignore. Gil Orbach, the chief investment officer at Spruce Private Investors—an independent boutique firm in Darien, Conn.—has compared the annualized returns of Harvard and Yale to those of more traditional long-only approaches that invest in diversified stocks, bonds and cash. The 15-year annualized return shows Yale up 17 percent and Harvard up 15.5 percent, while the long-only blend is up only 8.5 percent. "The key message," Orbach says, "is that there is a strong argument for a multiasset approach and a meaningful and significant allocation to alternatives."























Source: Spruce Private Investors

Risks and Returns
According to Orbach, the Harvard-Yale approach to investing is not new. "They happen to be among the best at doing this, and are responsible for refining and systemizing the approach, but [other] top college endowments are also doing it." Orbach adds that many affluent families now have significant allocations to alternatives as well.

But the strategy’s historical returns are not the entire story, as Orbach is quick to point out. "This is not just a return argument, it’s a risk argument," he says. Alternative asset classes are used to diversify and dampen pure market risk. Orbach’s charts show that during particular crisis periods such as October 1987, the summer of 1998 and 2001–2002, all three investment styles lost money, but Harvard’s and Yale’s losses were significantly smaller.

Of course, large endowments have the advantage over families in terms of experienced staff, purchasing power, tax-exempt status and greater access to leading funds, so families need to consider that factor in order to make a valid comparison to a long-only investing approach. They must judge the merits of the endowment approach overall, versus the specific performance of a particular leading endowment.

Allocating a significant portion of a portfolio to alternatives is not a hard sell for families, Orbach believes, although he says that a minority of them find some of the strategies daunting and the reporting and disclosure opaque.

Another consideration is that during crisis periods, investors who think they are diversified because they have multiple managers within a given asset class often learn a hard lesson. Orbach charted 42 crisis months from January 1980 to April 2007, and calculated the correlation of different asset-class indexes to each other. He found that during these periods, correlation of various investment styles within a given asset class increased, meaning they moved together, negating the principle of diversification. "The moral of the story," he says, "is that many traditional equity managers give an investor lots of styles, but little diversification."

Access Issues
For individual investors who are attracted to the alternative investment style, there are drawbacks worth noting, including lack of liquidity, high taxes and the most worrisome buzzword among families: access.

"The challenge with the goal of emulating Harvard and Yale can be summed up in that one word," says Charlotte Beyer, the founder of the Institute for Private Investors, a networking and educational resource for wealthy families and their advisors. Because of the size of the Harvard and Yale endowments—$26 billion and $18 billion, respectively—these institutions and their financial managers have the clout to access the most exclusive funds, a luxury that many individual and family investors do not have. However, the desire for such access is strong and growing. The institute conducted a recent survey of its members, concluding that 74 percent of respondents view alternative investments as risk-reduction tools.

More families also understand the complexity of alternatives, which are designed to negate the traditional stock market fluctuations and deliver better returns for the portfolio. The downside is that access to these alternatives may become still more restricted, even for the world’s very affluent population—those with more than $30 million in assets. According to the Merrill Lynch and Capgemini World Wealth Report 2007, the global population of the superrich grew by 11.3 percent from 2005 to 2006, with their total wealth jumping 16.8 percent. It is these investors who will most likely demand sophisticated alternative investments, and that in turn affects access.

According to Beyer, 10 years ago investors were given a "guide to the warehouse" with the advent of open architecture. Firms that adhere to this philosophy do not employ money managers in-house, opting instead to choose from the pool of outside managers. Beyer says the next transformation, in which "several aisles in the warehouse may be closed," has to do with lack of access to alternatives for individual investors, who will receive second-class treatment compared to the multibillion-dollar endowments.

Mega hedge and private equity funds are not as attracted to individual investors, she says, because of the world’s growing number of institutional investors. Private investors face challenges gaining access, and may have already lost their "most-favored-nation status."

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.

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-Yale Performance
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.