Asset Allocation

Derivatives Strategies for Endowment and Foundation Portfolios: The Manager Perspective

Topics - Asset Allocation Risk Parity

${ numberSection } ${ text }
Derivatives Strategies for Endowment and Foundation Portfolios: The Manager Perspective

Many endowment and foundation funds automatically maintain a mix of 60% stocks and 40% bonds, and numerous researchers will tell them they are wrong. Charts of the cumulative value of $1 invested in various portfolios from 1926 through 1993 show a dollar growing to $800 if invested in equities, $40 if invested in bonds and $330 if invested in the 60/40 mix. The obvious conclusion from such evidence is that long-term investors should invest only in stocks.

That conclusion is precisely the notion that this presentation attempts to dispel. If a foundation or endowment decides to take on additional risk, there are better ways to achieve higher returns than a 100% equity portfolio. I argue that long-term investors who are willing to bear the risk of a 100% equity portfolio can do better with a diversified portfolio while keeping their risk the same.

For example, assuming that the 20% volatility of an all-stocks portfolio is acceptable to an investor, the issue is how that investor can come up with an alternative portfolio that has the same volatility as an all-equity portfolio but provides higher returns. One solution is that, instead of putting all of the money in a very volatile asset, such as equities, the investor puts all of the money in a diversified portfolio-say, 60% stocks and 40% bonds — and then borrows funds to buy more of this diversified portfolio.

Published in

CFA Proceedings Quarterly

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.