“Yale invests in highly correlated asset classes”

The title of this post is taken from a sign held up at the annual Harvard-Yale football game. It’s a low blow: the Yale investment model famously prides itself on the pursuit of diverse return sources.


The challenge with diversification is not the math; you don’t need an Ivy League education to understand why it’s best to avoid having all of your eggs in one basket. Rather, the challenge is finding investment opportunities that are (a) worthwhile investments (b) genuine diversifiers and (c) accessible.

Capitalism tends to reward the suppliers of capital, but it does not give up its fruits easily. Not every opportunity is a good opportunity. If diversification alone were a magic formula for successful investment, investors could turn to Bob’s Giant Coin Flip: this divides investors into two camps—heads and tails—and I flip a giant coin each month. Whenever the coin shows heads, the investors who backed tails pay $1 million each to those who backed heads. If tails shows, vice versa.

The coin is uncorrelated to all other assets, but it’s a poor investment (even before my few basis points—or should that be 2-and-20?—fee for supplying the coin.) No sensible asset allocation model should allocate to a coin flip, no matter how good a diversifier it is.

As for (b) in my list above (genuine diversification)—that, too, does not always come easy. Certainly, historical correlations can be unreliable indicators of whether an investment will prove to be a good diversifier when you really need it.

And those opportunities that are both worthwhile investments and genuine diversifiers are often not easy to get into. The Yale University Investments Office website highlights its active management of “illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.” That demands a commitment of resources that is beyond the means of all but the largest institutions; it’s not an easily-replicable model.

Investment, in other words, is not easy.

End note: although it did make me smile, the unnamed Harvard student’s sign does not quite match the notorious Yale student prank of 2004. Still, at least Harvard won the football game.


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