MIAMI BEACH — Endowments are rethinking where they invest as they prepare for lower returns from traditional assets, and digital assets could be in their crosshairs.
At the iConnections conference Tuesday, several chief investment officers said the playbook that delivered gains over the past decade may not perform as well over the next decade. Equity valuations remain high, credit spreads are near historic lows and private markets are saturated, leaving little room for error.
“I think in general our expectation is that for all the traditional asset classes that we’ve invested in, we kind of think it’s both a yield compression and probably an 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 about 5% of their assets each year. Add operating costs and the critical rate increases. “If you don’t get an 8 percent return, the model doesn’t work,” said Carlos Rangel of the WK Kellogg Foundation, one of the largest American philanthropic foundations in the United States.
This pressure pushes investment teams to look further. Columbia’s Lew said generating outperformance might require going “a little further down the risk curve” and exploring strategies they haven’t used before.
This research has, in some cases, led endowments into cryptocurrency markets that were once considered too volatile or too operationally complex for traditional institutions, particularly endowments.
Early university investors such as Yale and Harvard backed crypto-focused venture capital funds years ago, gaining indirect exposure to digital assets through private vehicles. More recently, the approval of bitcoin and ether spot exchange-traded funds (ETFs) in the United States has offered a simpler path forward. Harvard University and Brown University, for example, disclosed their positions in Bitcoin and Ether ETFs in their latest 13F filings.
However, even as these large funds discuss crypto allocations amid challenging returns from traditional assets, the digital asset sector is, at least since late last year, more challenging for investors.
Over the past year, digital assets have failed to outperform equity markets as a whole and have experienced periods of high volatility. Bitcoin has fallen 26% over the past year, while the S&P 500 is up nearly 17% over the same period.
However, these institutions typically invest over long time horizons and can likely tolerate short-term withdrawals in pursuit of long-term gains. In fact, with bitcoin prices down nearly 50% from their all-time high in October, while all other asset classes have risen, these funds may be cautiously pursuing underperforming assets such as cryptocurrencies.
A pivot of feeling
Although the allocations appear small compared to the overall portfolios of these giant funds, the disclosures show how digital assets have moved from the fringes of institutional finance to the mainstream toolbox.
For endowments facing lower expected returns from stocks and bonds, crypto ETFs can serve as a high-risk, high-volatility satellite position.
Nonetheless, the panelists made clear that the broader challenge extends beyond a single asset class. Many institutions are tempering their expectations after years of strong market performance. Equity risk premiums appear thin, private markets hold record amounts of unsold assets, and macroeconomic uncertainty remains high.
“I think it’s a very difficult setup for exceptional returns,” Columbia Lew said.
