LOUISVILLE, Ky. - Ramsey Quantitative Systems, Inc. (RQSI) has released a new research paper that critiques the classic endowment model and introduces a modified framework, the New Endowment Model (NEMO), in response to the environment investors face today. NEMO seeks to emphasize the true elements that yield returns within and across different financial instruments instead of the Yale Model’s more simplistic asset class definitions; the result is a more robust and dynamic approach to institutional investing. NEMO provides a clearer, more thoughtful path for institutional portfolios to fulfill the purposes they exist to serve by basing asset allocation on the specific challenges faced by each institution and prioritizing foundational sources of return in manager selection.
“We are not diminishing the value of the original seminal work, but much has changed since then,” said Neil Ramsey, CEO of RQSI. “Fixed income yields have plummeted, rendering them less valuable in a portfolio. Correlations of emerging markets, real estate, and real assets have risen to equities while developed equity markets correlations have risen to almost 1 with globalization. In addition, access to high-quality private equity and private debt has grown substantially.
“Allocating by asset type does not capture the true diversification of investments. It’s important to understand your diversification across foundational sources of return to determine true diversification, which is why we developed the New Endowment Model.”
Developed in 2000, the Yale Endowment Model was quick to become the leading portfolio strategy for institutions by challenging the traditional 60/40 stock-bond portfolio, focusing on diversifying away from conventional fixed income and equities with lower correlation, performance-oriented assets such as hedge funds, private equity, real estate, and other alternatives. While the allocation strategy has certainly proven itself as evidenced by the growth of Yale’s endowment over the last 20 years, institutional investors face a different set of challenges today that make the old endowment model less relevant than before:
- Global Bond yields have continued to plummet over the last 5 years, making almost any allocation to global bonds a drag on a portfolio’s expected return.
- Private credit opportunities that were not available when the old endowment model was created demand consideration.
- Emerging market and development international equities, real estate, private equity, commodities, and high yield debt have all seen their correlations rise significantly.
- Liquid alternatives, such as managed futures and hedge funds, have delivered disappointing results with less diversification than modeled.
RQSI’s New Endowment Model addresses the shortcomings of the classic framework, namely in its approach to allocation by structural sources of return. NEMO defines these foundational sources of return－illiquidity premium, equity risk premium, information arbitrage, manager skill, duration risk premium, and credit risk premium－and centers asset allocation on capturing them rather than the Yale Model’s nominal, shallow asset class definitions.
Along with the research paper, RQSI’s New Endowment Model can be explored through an upcoming interactive visualizer for a deeper view into the implications of the modified framework. After entering allocation details, investors can analyze the historical performance of a given portfolio compared to NEMO’s recommended asset mix, dynamically changed based on the user’s existing allocations and portfolio objectives.
Ramsey Quantitative Systems, Inc. (RQSI) is a quantitative investment firm headquartered in Louisville, Kentucky. Founded in 1986 by Neil Ramsey, RQSI has been a pioneer in systematic trading for over 34 years. RQSI’s alternative investment strategies have earned numerous accolades including a recent 2019 win for Best Systematic Macro Fund at the HFM Global CTA Intelligence Awards.