MIAMI BEACH — Endowments are rethinking where they invest as they prepare for weaker returns from traditional assets, and digital assets may be in their crosshairs.
At the iConnections conference on Tuesday, several investment executives said the playbook that drove gains over the past decade may not perform as well in the next. Equity valuations remain high, credit spreads are near historic lows and private markets are crowded, leaving little room for error.
“I think overall our expectations are that for all of the traditional asset classes that we’ve invested in, we kind of think this is both return compression and probably Alpha compression,” said Kim Lew, CEO and president of Columbia Investment Management Company.
Lower expected returns create a mathematical problem. Private foundations, for example, must pay out around 5% of assets each year. Add operational costs and the hurdle rate goes up. “If you don’t earn an 8% return, the model doesn’t work,” said Carlos Rangel of the WK Kellogg Foundation, one of the largest US philanthropic foundations in the US
That pressure is pushing investment teams to look further afield. Columbia’s Lew said generating outperformance may require going “a little bit further on the risk curve” and exploring strategies they haven’t used before.
This search has in some cases brought grants into cryptocurrency markets that were once considered too volatile or operationally complex for traditional institutions, especially endowment funds.
Early university investors like Yale and Harvard backed crypto-focused venture funds years ago, gaining indirect exposure to digital assets through private vehicles. Recently, the approval of spot bitcoin and ether exchange-traded funds (ETFs) in the US has offered a simpler route. Harvard University and Brown University, for example, have disclosed positions in both bitcoin and ether ETFs in their recent 13F filings.
But even as these major funds discuss crypto allocations amid tough returns from traditional assets, the digital asset sector has been, at least since late last year, tougher for investors.
Digital assets have underperformed broader equity markets over the past year and have experienced periods of steep volatility. Bitcoin is down 26% over the past year, while the S&P 500 is up nearly 17% over the same period.
Nevertheless, these institutions typically invest with a long time horizon and are likely to tolerate short-term moves in pursuit of long-term gains. In fact, since bitcoin prices have fallen nearly 50% since their record high in October, while all other asset classes rose, these funds may be cautiously looking for underperforming assets such as crypto.
A sentiment focal point
While the allocations appear small compared to the total portfolios of these giant funds, the information shows how digital assets have moved from the fringes of institutional finance to the mainstream toolkit.
For endowments facing lower expected returns from stocks and bonds, crypto ETFs can serve as a high-risk, high-volatility satellite position.
Still, the panelists made it clear that the broader challenge extends beyond any single asset class. Many institutions are tempering expectations after many years of strong market results. Equity risk premiums look thin, private markets have record amounts of unsold assets and macro uncertainty remains high.
“I think it’s a really difficult setup for excellent returns,” Columbia Lew said.
