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High Finance for High School

Under CIO Amy Falls, Phillips Academy Andover has a new take on alternatives.

The hedge fund managers involved with mandates from Phillips Academy Andover’s $804 million endowment were reminded after the hiring of CIO Amy Falls in September 2005 that they should not take their status for granted.

During Falls’s first full year — when returns nearly doubled, to 21.2 percent — the endowment began to drastically trim the number of managers; since her arrival it has cut the roster to 18 from 35. “When I took over, we had more managers, and we knew less about each one,” says Falls, 44, a 1982 graduate of Andover who left her New York–based job at Morgan Stanley, where she had been a managing director and global fixed-income strategist, to take the post. “What we’ve tried to do is to go through and systematically concentrate on managers in whom we had a lot of conviction.”

The move was part of a broader rethinking that Falls advocated for streamlining the endowment’s allocation to alternative investments. Although Andover has fewer managers now, the private school has a larger percentage of its assets in hedge funds, and the mix is not as closely correlated to stock indexes as it used to be.

Andover, about a 40-minute drive north of downtown Boston, became something of a pioneer by hiring Falls: It was the first secondary school in the U.S. to put a CIO on its payroll. Since then one other boarding school has followed suit: Choate Rosemary Hall in Wallingford, Connecticut, which took on a CIO in September 2006.

For Andover the decision to hire a CIO grew naturally from earlier efforts to model its investments after those of university endowments. “The school figured that if we were going to start to look more like a college in terms of our investment profile,” Fall says, “we should look more like a college in terms of our oversight.”

A part-time, 12-member volunteer committee managed the school’s portfolio before the appointment of Falls. The committee had permitted a 30 percent direct allocation to hedge funds (since increased). Though members brought considerable alternative-investments expertise to the table, they lacked the time to sort through and pick managers. Falls’s presence allows for more informed decisions on which hedge funds managers to hire (she won’t reveal any names).

The other major alteration: relabeling and distilling the endowment’s hefty hedge fund allocation into two clear-cut categories — 25.7 percent of total assets to absolute-return hedge funds and 9.2 percent to what Falls calls “enhanced equity” hedge funds. The former category houses hedge funds working completely outside the equity markets, like distressed-debt and some multistrategy funds. The latter focuses on long-short managers.

“We have begun to move away from the concept of using hedge funds as an asset class,” explains Falls. “The allocation hasn’t gone up much, but we think about it very differently.”

The remaining two thirds of Andover’s endowment is divvied up among U.S. equities (17.6 percent); foreign equities (11.5 percent); private equity (10.7 percent); real assets, including timber, oil-and-gas partnerships, minerals and commodities (9.9 percent); fixed income (6.1 percent); emerging-markets equities (5.8 percent); and cash (3.6 percent).

Falls says the reorganization gives the endowment a better idea of its risk profile and leaves its portfolio less vulnerable to the whims of the stock market.

“One of the things that I first looked at when I got here was the correlation of the endowment’s returns to the equity market,” she explains. Falls had heard that institutional investors — like pension funds and endowments — tend to have more beta in their portfolios than they think, and she suspected that was true of Andover.

“Even though we had gone substantially into alternative assets, we still were showing a pretty high correlation to the stock market,” she says. “When you drilled down, it was because some of the hedge fund strategies had a high correlation. We began to reclassify.”

The setup has already proved effective, Falls says, helping buffer the portfolio through recent market turbulence. As she had hoped, the enhanced-equity portfolio has provided downside protection and the absolute-return fund yielded an 8.5 percent return for the year ended June 30, giving the endowment a much-needed boost. The 12-month return through June 30 was 1.75 percent, compared with the 13 percent loss on the Standard & Poor’s 500 index over the same time period.