CAIA - 03 - The Endowment Model Flashcards
An ___ is a donated pool of capital that is intended to be invested to maintain the real value of its assets in perpetuity and to provide an annual income to support a purpose specified by the donor of the capital.
An endowment is a donated pool of capital that is intended to be invested to maintain the real value of its assets in perpetuity and to provide an annual income to support a purpose specified by the donor of the capital.
The nominal value of an initial donation that is to be maintained is referred to as the ___.
The nominal value of an initial donation that is to be maintained is referred to as the corpus.
A ___ is a non-profit organization that either funds its own charitable causes or donates funds to other organizations.
A foundation is a non-profit organization that either funds its own charitable causes or donates funds to other organizations.
Foundations differ from endowments in the following ways:
- They are ___-making institutions, whereas endowment funds are established to provide funds for a specific purpose.
- They tend to have ___lives
- They are subject to ______requirements
- They are (more/less) likely to receive funding from ongoing donations
Foundations differ from endowments in the following ways:
- They are grant-making institutions, whereas endowment funds are established to provide funds for a specific purpose.
- They tend to have finite lives
- They are subject to minimum spending requirements
- They are less likely to receive funding from ongoing donations
There are several types of foundations:
- O___
- C___
- C___
- I___
There are several types of foundations:
1. Operating
2. Community
3. Corporate
4. Independent
___ foundations are most like endowments, in that the income generated is used to fund the foundation’s operations.
Operating foundations are most like endowments, in that the income generated is used to fund the foundation’s operations.
___ foundations are located in a specific geographic region and distribute gifts and investment returns to other local charities.
Community foundations are located in a specific geographic region and distribute gifts and investment returns to other local charities.
___ foundations tend to donate to local charities in the region in which the company has the most employees or customers.
Corporate foundations tend to donate to local charities in the region in which the company has the most employees or customers.
___ foundations are funded by an individual or a family often with a single gift in the form of stock, and typically no subsequent gifts.
Independent foundations are funded by an individual or a family often with a single gift in the form of stock, and typically no subsequent gifts.
Independent foundations present two challenges:
- Wealth is often concentrated in a ___ ___
- They do not typically receive ___ ___ .
Independent foundations present two challenges:
- Wealth is often concentrated in a single stock
- They do not typically receive additional donations.
The goal of an endowment manager should be to maintain ___ equity.
The goal of an endowment manager should be to maintain intergenerational equity.
Intergenerational equity may be expressed as a ___% chance of maintaining the real value of the endowment in perpetuity.
Intergenerational equity may be expressed as a 50% chance of maintaining the real value of the endowment in perpetuity.
If the chance of the endowment surviving in perpetuity is low, it means that the endowment’s spending rate is (high/low).
If the chance of the endowment surviving in perpetuity is low, it means that the endowment’s spending rate is high.
Endowments (do/do not) have flexibility in their spending rates. This contrasts with U.S. foundations that are required to spend at least ___% per year on operating expenses and charitable activities.
Endowments do have flexibility in their spending rates. This contrasts with U.S. foundations that are required to spend at least 5% per year on operating expenses and charitable activities.
To be able to operate in perpetuity and meet payout ratios, endowments and foundations need to reach a ___ ___.
To be able to operate in perpetuity and meet payout ratios, endowments and foundations need to reach a return target.
Foundations that want to preserve the real value of their assets will have an ___ target return: ___ plus a minimum of ___ %
Foundations that want to preserve the real value of their assets will have an aggressive target return: inflation plus a minimum of 5%
The higher education price index (HEPI) is typically ___ than CPI
The higher education price index (HEPI) is typically higher than CPI
The ___ model is an investment approach that aims to generate high returns through aggressive asset allocations, particularly to alternative investments.
The endowment model is an investment approach that aims to generate high returns through aggressive asset allocations, particularly to alternative investments.
David Swensen does not invest in investment-grade or high-yield bonds due to the ___-___ conflict of corporate managers working for stockholders and possibly making decisions that would be detrimental to bondholders.
David Swensen does not invest in investment-grade or high-yield bonds due to the principal-agent conflict of corporate managers working for stockholders and possibly making decisions that would be detrimental to bondholders.
The investment outperformance of large endowments may be due to six advantages that large endowments possess.
- Aggressive ___ ___
- Effective investment ___ ___
- ___ -___ advantage
- Access to network of ___ ___
- Acceptance of ___ risk
- Sophisticated ___ ___ and ___ oversight
The investment outperformance of large endowments may be due to six advantages that large endowments possess.
- Aggressive asset allocation
- Effective investment manager selection
- First-mover advantage
- Access to network of talented alumni
- Acceptance of liquidity risk
- Sophisticated investment staff and board oversight
Typically, (more/less) returns come from security selection and market timing (TAA) in an endowment vs. a pension.
Typically, more returns come from security selection and market timing (TAA) in an endowment vs. a pension
Top endowment funds’ manager-selection and first-mover advantage can be attributed to their superior ___ ___. (i.e., good relationships with successful people)
Top endowment funds’ manager-selection and first-mover advantage can be attributed to their superior network effect. (i.e., good relationships with successful people)
___-___investment consultants advise on issues such as asset allocation and manager selection, and advice/decisions are taken to the investment committee for a vote.
Non-discretionary investment consultants advise on issues such as asset allocation and manager selection, and advice/decisions are taken to the investment committee for a vote.
___ ___ are external consultants with discretionary authority to make and implement specific decisions without the investment committee’s vote.
Outsourced CIOs are external consultants with discretionary authority to make and implement specific decisions without the investment committee’s vote.
The benefits of OCIOs is as follows:
- Improved ___
- ___of ___in manager research
- More ___ ___
- More efficient ___-___
The benefits of OCIOs is as follows:
- Improved resources
- Economies of scale in manager research
- More cost effective
- More efficient decision-making
Large endowments need to address specific risks:
- Interaction between ___ ___ , ___ , and the endowmen’t s long-term ___ ___
- ___ risk and challenges with ___
- Protecting against ___ risk
Large endowments need to address specific risks:
- Interaction between spending rates, inflation, and the endowmen’t s long-term asset value
- Liquidity risk and challenges with rebalancing
- Protecting against tail risk
Studies show that, all else equal, funds with long lock-up periods tend to generate (higher/lower) returns.
Studies show that, all else equal, funds with long lock-up periods tend to generate higher returns.
___ ___ investing uses a 3 tiered a approach to match liquidity to investors’ time horizons in asset allocation decisions.
- Tier 1 assets are ___ -___ , ___ assets
- Tier 2 assets are ___ , ___ assets
- Tier 3 assets are ___ , ___ assets.
Liquidity driven investing uses a 3 tiered a approach to match liquidity to investors’ time horizons in asset allocation decisions.
- Tier 1 assets are low-risk, liquid assets
- Tier 2 assets are risky, liquid assets
- Tier 3 assets are risky, illiquid assets.
What are the 4 methods for hedging tail risk?
- Increase allocations to ___ and ___ -___ debt
- Use equity ___ ___
- Construct a portfolio of ___ options on currencies, commodities, and credit products and ___ options on volatility indices and high-quality bonds.
- Structure allocations within ___ ___ to reduce exposure to extreme events
What are the 4 methods for hedging tail risk?
- Increase allocations to cash and risk-free debt
- Use equity option hedges
- Construct a portfolio of put options on currencies, commodities, and credit products and call options on volatility indices and high-quality bonds.
- Structure allocations within asset classes to reduce exposure to extreme events
The basket hedging approach is considerably (more/less) costly than equity option hedges.
The basket hedging approach is considerably less costly than equity option hedges.
In contrast to exchange-traded hedges, hedges purchased in the over-the-counter market are exposed to ___ risk, which is generally extremely high during crises.
In contrast to exchange-traded hedges, hedges purchased in the over-the-counter market are exposed to counterparty risk, which is generally extremely high during crises.
