University Endowment Sued for Under performing the S&P 500
Beating the S&amp;P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&amp;P and a higher risk-adjusted return. If a school&#x27;s endowment had the same return and volatility of the S&amp;P 500, that would be quite disturbing.<p>An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and have a moderate but stable return stream.<p>A core component is usually the S&amp;P 500, with the rest invested in assets and strategies that have low correlation to the market.<p>We don&#x27;t know the volatility of the endowment, so maybe it is just shitty, but having a lower return than the S&amp;P is to be expected. And if it did match the S&amp;P, that would indicate to me that perhaps too much risk is being assumed.<p>Non finance people make this mistake all the time, thinking that return is something anyone cares about. Return is synthetic, in that any positive return can be trivially leveraged up to whatever number you desire. Because of this, what matters is the Sharpe ratio, because it gives you a blueprint of sorts: it tells you how your volatility and return will scale with leverage.