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Why Alternative Asset Managers Make the Best Board Members

Endowments with investment committee expertise in private markets have higher returns, a study finds.

  • By Amy Whyte

Behind the best performing endowment funds are investment committees stacked with professional investors in alternative asset management, according to new research from the University of North Carolina and University of Virginia.

Board expertise within alternatives broadly and private markets specifically was proven to lead to higher performance among endowments, Matteo Binfaré and Gregory Brown of the University of North Carolina, Robert Harris at the University of Virginia, and UNC’s Christian Lundblad found in a working paper.

The presence of these alternative investment professionals on an endowment’s investment committee was linked to higher allocations to alternatives and better manager selection within the specific asset classes represented on a fund’s board.

“Even controlling for benchmarks of average performance in alternative assets, higher expertise produces higher returns,” the authors wrote.

[II Deep Dive: Board Conflicts of Interest Pose Threat to Pension Fund Returns]

For the paper, they analyzed the board make-up and investments of 579 endowments between 2007 and 2015. Nearly a quarter of all trustees had backgrounds in alternative assets, with 10 percent tied to private equity, 8 percent to real estate, 7 percent to commodities, and 6 percent to venture capital.

Among individual funds, 83 percent had at least one alternatives expert on their board, with larger endowments most likely to have trustees drawn from the alternatives sector. 

In particular, private equity and venture capital stood out as areas where having connections to investment professionals mattered. 

“This is consistent with being able to overcome restrictions or barriers to investing in funds that might otherwise be difficult or impossible to access,” Binfaré and his co-authors wrote. “Expertise matters for the selection components of returns in alternative investments.”

A 10 percent increase in the proportion of the board with venture capital experience, for example, was associated with a 100- to 120-basis-point increase in excess returns.

“Overall, our findings indicate that endowments likely benefit from seeking out investment experts to serve on their governing bodies,” the authors wrote.

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