Why is it that the endowments of the major New York art museums yield worse returns than your retirement fund? Take the Whitney — the current board of trustees has folks like Trump mega-donor Victor Ganzi, and Citadel founder and hedge fund all-star Kenneth C. Griffin. These guys have access to the most talented and ruthless financial minds on the planet, yet the endowment that they are the fiduciaries for lags about five percent behind a standard balanced portfolio. That five percent lag cost the Whitney about $115,301,790 from just 2009 to 2016.
Whitney Endowment Returns against Benchmarks
YearWhitney endowment returnsAverage of 28,696 US non-profit endowmentsCRSP equity returnsU.S. Treasury ReturnsBalanced portfolio returns (60/40)2009-0.086.0842-.0011-.0087-.00412010.0641.0874.1761.1065.14832011.1328.1145.1525.1306.14372012.0183.0477.0979.1800.13072013.1379.0988.2473-.0960.11002014.1263.0816.1839.1386.16582015.0406.0027.0210.0418.02932016-0.0199.0232.0576.1210.0830Full sample average0.0517.0665.1220.0796.1051
Whitney Endowment Potential Returns using Benchmark
YearWhitney actual returnsWhitney Actual start-of-year endowment valuePotential Whitney return rate (60/40)Whitney potential returnsDifference in returns added to following start-of-year potential valueWhitney Potential start-of-year endowment value, following year2,009-17,044,000.00198,755,500.000.00-814,897.5516,229,102.00194,216,602.00201011,412,000.00177,987,500.000.1528,802,322.0817,390,322.08211,606,924.0820124,843,000.00187,000,500.000.1430,407,914.995,564,914.99226,184,839.0720123,840,000.00209,017,500.000.1329,562,358.4725,722,358.47273,924,197.53201328,968,000.00210,050,500.000.1130,131,661.731,163,661.73276,120,859.26201431,184,000.00246,858,000.000.1745,780,838.4714,596,838.47327,525,197.73201511,793,000.00290,012,500.000.039,596,488.29-2,196,511.71368,483,186.022016-6,247,000.00313,110,500.000.0830,584,104.4436,831,104.44428,412,290.46 0.11 total:115,301,790.46
I didn’t understand any of this stuff at first. This research started for me around the time of the Tear Gas Biennial. I wanted to find out whether the Whitney’s endowment was invested in Warren Kanders’s business. (They were, at least indirectly, through a firm called Adage Capital Management’s stake in BlackRock.) I discovered that the Whitney’s financial audits were freely available online, so I set out to learn how to decipher them. Part of the picture, I realized, was also in their tax filings (990s) which I also found were publicly available. Soon enough, I was looking at all the audits, and finding out all kinds of cool stuff. For example, if you check out page 35 of the MoMA audit, you’ll see that the Tower condos are exempt from property tax, so the museum levies its own equivalent tax like a little Vatican, or colony.
As I started to develop a beginner’s literacy with this material, I realized that I would never understand it truly without some basic knowledge of financial instruments and norms. For most of my life I’ve worked as a bike messenger or in restaurants, living at a level of precarity that never really gave me cause to figure out how a mutual fund works.
It was in the process of teaching myself finance that I came across an abundance of research on non-profit endowment asset allocation and performance. This study of the endowment performance of 28,000 US non-profits was a major discovery. A picture was beginning to develop that made very little sense, but was empirically true — non-profit endowments do very, very poorly on average. That same study contained instructions on how to replicate their data, and so I applied it to the Whitney and saw that it does worse than the average, which is already bad. My next question was why.
In the 1980s, Yale University rewrote the playbook for endowment investing — it’s complicated but the basic principle is that they determined that they did not need to prioritize liquidity, which is the ability to actually convert an investment into cash, as high as other kinds of investing bodies, and so they played with assets that might offer higher returns over a long period, but with less liquidity. These are alternative assets, like hedge funds, private equity, or even cryptocurrency. Yale was incredibly successful with this model, and it soon caught on. Between 1986 and 2019, the average endowment allocation to alternatives rose from 4% to 58%. For this model to work, you need the best of the best managers. The average large endowment relies on over a hundred managers to actively handle their investments.
Allocation to Alternatives over Time (Dollar-Weighted Means)
19861990199419982002200420082019Hedge Funds 2.40%6.20%14.70%17.90%23.10%20.50%Distressed Securities and Event Arbitrage 0.10%2.10%2.40% Real Estate2.30%4.40%4.20%6.90%5.90%5.00%7.50%6.50%Venture Capital 3.70%4.50%4.40%4.70%4.40%4.00%9.00%Leveraged Buyouts 1.40%2.10%3.80%4.20%4.20%10.10%13.60% Natural Resources 1.10%1.10%0.90%1.90%2.50%6.50%6.00%Other1.60%1.30%1.50%2.00%2.20%3.20%2.30%2.40%Total Alternatives4%12%18%27%34%37%54%58%Source- NACUBO
Not everyone is Yale University. Not every non-profit has access to innovative in-house financial genius. But that hasn’t stopped them from pretending that they do, and while many endowments are trying the Yale Model, few are capable of implementing it fully. In 2019, the Whitney’s endowment was 61% alternative assets.
While most endowments enjoyed good returns during the golden age of alternative investments in the ‘90s, the long-term reality has been grim. Student alumni groups at some universities are beginning to take action, worried that their donations are being squandered. Today, it’s possible to capture the average growth of the stock market through passive index funds, which if balanced with some government bonds, have realized 10% returns over the last 100 years. It’s hard to fathom why an endowment would spend so much time and money on actively managing its investments to do considerably worse than that.
The authors of the study I mentioned before, Sandeep Dahiya and David Yermack, thought to test out a theory as to why some funds do worse than others in an earlier version of their paper. They were able to determine that there is a direct correlation between large endowment performance and distance in miles to Wall Street — the closer the fund is geographically, the worse it does. They speculate that this is because those funds are particularly vulnerable to predatory sales pitches from fund managers looking to hock risky and hard to understand financial products. They dropped this element from the most recent version of the paper, when I reached out to Yermack for a comment he replied that the data didn’t meet their standards when they expanded the timeframe, and he added that “There is a lot of noise in the data from one institution to the next.”
I don’t know for sure, but board members likely enjoy the opportunity to endear themselves to the banks and firms that sell these products. After all, it’s not their money they are risking. In fact, when they do risk their own money, they rarely go above 10% in alternative assets.
Any serious solution to this situation starts with the abolition of the museum board structure. They have no accountability, they elect their own members, and they have completely fucked up the one thing that they were supposed to be good at. As to what to replace them with, I don’t think it’s hard to imagine a body that is democractic and accountable, populated by members of the community with a meaningful interest in the work of a museum.
Smaller institutions with smaller endowments usually have way less allocated to alternatives, and according to Dahyia and Yermack, realize better returns if you account for their weaker buying power. They are likely less attractive to the above-mentioned predatory sales pitches and they also tend to have board members with more direct ties to the community, and thus more of a stake in the work at hand. I treat them a bit like a proof of concept that actually caring about the thing you’re doing helps you do it well.