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Technical University of Munich

Strategic Asset Allocation and Performance of University Endowment Funds: Cross-Institutional Evidence from the United States

Advisor: Dr. Sara Boni

Type: Bachelor's Thesis
Start: asap

 

Overview

University endowment funds represent some of the most sophisticated long-term investors in financial markets. Their portfolios—spanning traditional asset classes such as equities and bonds, as well as alternatives like private equity, venture capital, and hedge funds—play a central role in sustaining institutional missions and advancing educational and research objectives.

Despite their prominence, the determinants of endowment fund performance and allocation decisions remain imperfectly understood, particularly in light of the substantial heterogeneity observed across institutions. Large endowments, often associated with elite universities, exhibit high allocations to alternative assets and achieve above-average returns, while smaller funds tend to follow more conservative, liquid strategies.

This thesis aims to analyze the evolution, determinants, and performance implications of asset allocation choices among U.S. university endowment funds, emphasizing cross-institutional heterogeneity. It seeks to understand how factors such as fund size, governance quality, and investment horizon influence allocation patterns and risk-adjusted performance.

By integrating insights from financial economics and portfolio theory with modern empirical methods, the project will offer a nuanced view of how endowments manage intertemporal trade-offs between return, risk, and liquidity—and how these strategies have evolved in response to changing market conditions.

Objective

  • Motivation and Research Question

    • The endowment model of investing—characterized by diversified exposure to illiquid alternative assets—has profoundly influenced institutional portfolio management. However, endowments are not homogeneous: their investment strategies and performance outcomes differ widely. Understanding what drives these differences is key to assessing how institutional investors adapt to evolving financial environments.

  • Core Research Questions

    • How have U.S. university endowment funds adjusted their asset allocations over time across key asset classes?
    • To what extent do institutional characteristics (e.g., endowment size, governance, university type) explain differences in allocation strategies?
    • How do these strategies affect risk-adjusted returns, volatility, and drawdown resilience?
    • Are there systematic differences between elite and non-elite institutions, and what can they reveal about the efficiency of the “endowment model”?

Methodology

The empirical analysis will combine panel data econometrics with portfolio performance evaluation methods to study both trends and heterogeneity in endowment fund behavior.

Key methodological components include:

  • Construction of a panel dataset of U.S. university endowment funds, combining information from the NACUBO-TIAA Endowment Study, IPEDS, and public university financial reports.
  • Examination of asset allocation trends over time and across institutions.
  • Estimation of models linking endowment characteristics (size, governance, region, institution type) to portfolio composition and performance.
  • Evaluation of risk-adjusted returns using Sharpe ratios, alphas from multi-factor models, and downside-risk measures.
  • Subsample analysis to assess cross-institutional and temporal heterogeneity in investment behavior.

Expected Contribution

This thesis will:

  1. Provide an updated empirical account of asset allocation patterns among U.S. endowments over the past two decades.
  2. Quantify the degree of cross-institutional heterogeneity and its determinants.
  3. Evaluate whether the “endowment model” of investing yields systematically superior performance once adjusted for risk, size, and liquidity.
  4. Contribute to the literature on institutional asset management, portfolio theory, and financial economics by linking investment strategy to organizational characteristics.

Requirements

  • Strong interest in institutional investing and financial economics.
  • Familiarity with portfolio theory and risk-return modeling.
  • Empirical research experience and programming skills in Python, R, or MATLAB.
  • Ability to work with panel data and large datasets.

Set-up & Supervision

  • Ang, A., Goetzmann, W., & Schaefer, S. (2009). Evaluation of Active Management of the Norwegian Government Pension Fund—Global.
  • Brown, G., Garlappi, L., & Tiu, C. (2010). Asset Allocation and Portfolio Performance: Evidence from University Endowment Funds. Journal of Financial Markets, 13(2): 268–294.
  • Kaplan, S. N., & Schoar, A. (2005). Private Equity Performance: Returns, Persistence, and Capital Flows. Journal of Finance.
  • Lerner, J., Schoar, A., & Wang, J. (2008). Secrets of the Academy: The Drivers of University Endowment Success. Journal of Economic Perspectives, 22(3): 207–222.
  • Poterba, J. (2015). Investment Policy of Endowment Funds. Annual Review of Financial Economics, 7: 391–410.
  • Sensoy, B. A., & Weisbach, M. S. (2023). Institutional Investors and the Endowment Model Revisited. Review of Financial Studies.

Contact & Application

If you are interested in writing your thesis on this topic, please indicate this in your application. Please note that this topic can be expanded and/or taken in other directions depending on the student's own interests and ideas.

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