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This article focuses on practical ways now available for retail investors with limited wealth to replicate the performance and investment strategy of the best performing endowments using ETFs.

Top endowments like Harvard and Yale have been ahead of the curve in terms of asset allocation best practices for the last decades. Bad performances in 2008 have temporarily put into question their model, but the subsequent rebound in their risk-adjusted returns highlights that their approach to investing remains highly relevant and efficient.
It is difficult for retail investors to compete with the highly skilled staff of these endowments in terms of security selection. The good news is that their strategic asset allocation explains the bulk of their outstanding performance. So let us have a closer look at the current policy portfolio of Harvard's Management Company (HMC):
1. Global Equity: 46%
  • U.S. Equities: 11%
  • Foreign Equities: 11%
  • Emerging Markets: 11%
  • Private Equity: 13%
2. Absolute return: 16%
3. Real assets: 23%
  • Commodities: 14%
  • Real Estate: 9%
4. Fixed-income: 13%
  • Domestic Bonds: 4%
  • Foreign Bonds: 2%
  • High-Yield: 2%
  • Inflation-Indexed Bonds: 5%
5. Cash: 2%
This is where things get more complicated for retail investors. Harvard's success is driven by a broad diversification that goes much beyond the traditional stock/bond mix, and even beyond the diversification that can be achieved by gaining exposure to commodities or REITs. Indeed, the share of capital allocated to private equity and absolute return strategies has been consistently growing since the eighties and now stands, for HMC, at 29%. Most top endowments gain exposure to absolute return strategies by selecting and investing in hedge funds, which usually require a sizable minimum investment of at least one million.

So how can such performance be achieved by retail investors?

Private equity remains hardly available. The few ETFs that exist, such as PSP, are far from replicating the performance of this asset class and, especially, cannot offer the diversification advantage of true exposure to private equity. Similarly, the ETFs that try to replicate non correlated hedge fund strategies, such as QAI (Multi-Strategy Tracker), have poor track records.
But the development of ETFs has made it possible for savvy investors to implement for themselves dynamic strategies that can replicate the absolute return performance of hedge funds. We have detailed how this can be done conservatively here and here, and more aggressively here.
In the next part of this article, we show how implementing the above strategy for the 29% share of the private equity and absolute return allocation of the top endowment asset allocation brings us very close to replicating their overall performance. The table below compares the "normalized" allocation with the full allocation of the HMC, as well as the ETFs chosen to build the portfolio:
Harvard “Normalized”
Harvard with
Hedge Fund exposure
Global Equity
Domestic Equity
SPY (7%), IWM (4%)
International Equity
Emerging Markets
Private Equity
Absolute Return
Real Assets
DBC (9%), GLD (5%)
Real Estate
Fixed Income
Domestic Bonds
LQD (3%), IEF (3%)
Foreign Bonds
High Yield
HYG (2%)
Of course, the allocation to sub classes could be improved by adding more granularity (by market capitalization of investment style for domestic equity; by region for emerging equity…) to further improve the risk-adjusted returns of the portfolio. We also did not pick ETFs for foreign bonds because of their short history, but adding a global bond ETF (NYSEARCA:BWX), an emerging bond ETF (NYSEARCA:PCY) or an international inflation protected bond ETF (NYSEARCA:WIP) would make sense. But the purpose of the article is not to optimize an ETF portfolio replicating the HMC allocation. Rather, what we want to show here is that absolute return strategies are not only interesting per se, but are essential to reap the benefits of true diversification in a portfolio. Any improvement in the selection of ETFs representing the main asset classes will improve the performance of both portfolios. What is interesting here is the comparison between the two portfolios.
The chart and table below show the performance of the “normalized” portfolio, the portfolio with synthetic Hedge Fund exposure, and of a traditional 60/40 mix of stocks and bonds - (click charts to enlarge).

Note how adding the synthetic exposure increase returns by almost 50% while reducing both volatility and drawdowns significantly. It is also striking how close to the actual performance of the HMC this portfolio is. This underscores the incredible benefits of adding uncorrelated asset classes to an asset allocation. Unfortunately, hedge fund and private equity are left out of the vast bulk of retail investors’ portfolios. In such circumstances, diversification is only an illusion.
One final note: mixing long term holds of core positions (core portfolio) with more active absolute return strategies (satellite portfolio) is an efficient approach to investing and allows to be reactive to market developments and trends. This is exactly what our strategies achieve in this context, by (monthly) tactically updating the asset allocation of the portfolio.

Disclosure: I am long GLD.

Source: How to Achieve the True Diversification of Top Endowments