3.
Data
As briefly mentioned above, our data are the following:
1. Public pension funds database (PPD, henceforth) : 150 state and local public pension
3
plans and annual data for 20012012.
2. NACUBO public aggregate data of endowment funds
4
3. News articles
Center for Retirement Research at Boston College utilized the annual financial reports of
individual funds to compile PPD. When they did, they used the label used in the report and did
not make any modification to the asset class labels. For instance, the hedge fund allocation and
absolute return allocation were treated as different variables in PPD, so we had to merge the two
variables. Also, in case that the asset allocations did not add up to 1, we had to go back and
doublecheck on those funds’ reports.
NACUBO stands for National Association of College and University Business Officers
(NACUBO), a membership organization representing more than 2500 universities across the
country and around the world. Its mission is to advance the economic and financial practices of
universities so that it ultimately benefits the academic objectives. The NACUBO aggregate data
on 700800 US colleges were reported on annual basis. First, we compiled all the annual data
from 20042013 into one data set to perform analysis of data over time. Unfortunately, the
individual funds data were by paid subscription only, but we were able to look up most annual
reports of the top 20 endowment funds in the rankings, such as Harvard, Yale, and University of
Texas system . However, we mainly use aggregate data for our analysis because each
5
endowment fund had different ways of classifying asset classes when they reported portfolio
allocation, so lack of standardized reports of individual funds motivated us to rely mostly on
aggregate data.
Endowment Funds
The average annual returns of endowment funds are given in the Table 1 below. It shows
that in 2008 and 2009, endowments suffered loss, especially a big loss of 17% on average in
2009. However, compared to the market performance (S&P 500 returned 26.2% in 2009 and
13.1% in 2008), endowment funds fared better. We used the public data provided by NACUBO
3
Public Plans Database. 20012010. Center for Retirement Research at Boston College and Center for State and Local
Government Excellence.
4
http://www.nacubo.org/Research/NACUBO-Commonfund_Study_of_Endowments/Public_NCSE_Tables.html
5
http://www.bc.edu/offices/endowment/top50endowments.html
12. honestly a bit naïve.
Impact of Volcker Rule on Hedge Fund Investments
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Another big story out of the hedge fund industry came straight from Wall Street.
Goldman Sachs is preparing to sell $285 million of their hedge fund holdings in the third quarter
of this year, continuing their massive selloff this year. The reason behind this move is because
of the creation of the DoddFrank act in 2010 following the financial crisis. Inside of this act is a
part called the Volcker Rule. The Volcker Rule bars banks from numerous types of investing and
trading with their own money, which has historically yielded tremendous returns for firms like
Goldman Sachs. The deadline to divest in these funds is July 2015.
Along with divesting in hedge funds, Goldman and other major banks began closing their
proprietary trading desks, which were part of the problem in the 2008 financial crisis. These prop
trading desks were involved in investing in hedge funds using the bank’s money, some of which
were operated by the bank themselves such as Goldman’s hedge funds. Now, the Volcker Rule
prohibits banks from supplying more than 3 percent of the money for its own hedge funds.
So far this year, Goldman Sachs has sold $2.55 billion it had in hedge funds and has
plans to get rid of $375 million more in the coming months. In total, Goldman has about $11.4
billion in funds that are subject to the Volcker Rule, with some of the remaining funds relatively
illiquid and hard to unload. This means banks may face major losses on illiquid investments in
funds subject to the Volcker Rule as they are hard to sell and may require them to be sold for
under fair market value.
As the Volcker Rule applies to all major banks and investment firms, we may see a major
pullback in hedge fund investments over the next year. Other banks like JPMorgan Chase, Credit
Suisse, Citi Group, Morgan Stanley, Bank of America Merrill Lynch, and others are in a similar
position as Goldman Sachs. While these banks will be able to retain a large amount of their
hedge fund investments, the minor pullback across the entire industry may stunt the growth of
the hedge fund industry as a whole. Many of these investments are illiquid and difficult to sell,
so both the banks and hedge funds could see losses. But what does this do to the longterm
success of the hedge fund industry.
After analyzing what the result of banks divesting some of their hedge fund holdings
would be, it seems apparent that hedge funds will need to source new investors to survive. The
large Wall Street investment banks are major clients for hedge funds, and while not all of their
investments need to be sold off, there is a significant amount of investments up for grabs. Hedge
funds, along with help from the banks who are selling, need to find new investors to pick up the
slack. This may be a major benefit to the hedge funds if they are able to further diversify their
7
http://dealbook.nytimes.com/2014/11/05/goldman-sachs-sells-285-million-in-hedge-fund-holdings/