Endowments consider cryptocurrency investments as traditional returns become more challenging.

Decreased anticipated returns from conventional assets have led some funds to explore bitcoin and ether exposure as a means of diversifying their portfolios.

Columbia University campus (Rob Kim/Getty Images)

What to know:

• Endowments and foundations are adjusting their strategies in anticipation of diminished returns from traditional assets as elevated equity valuations, narrow credit spreads, and saturated private markets restrict opportunities.
• Investment leaders indicate that reduced expected returns jeopardize the viability of payout frameworks, compelling institutions to explore greater risk and innovate with new strategies.
• Several prominent universities, including Harvard and Brown, have started utilizing bitcoin and ether ETFs as minor, high-volatility allocations, indicating that digital assets have become a recognized part of the institutional investment landscape.

MIAMI BEACH — Endowments are reassessing their investment strategies as they prepare for lower returns from conventional assets.

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During the iConnections conference on Tuesday, numerous chief investment officers expressed that the strategies that generated profits over the last decade may not yield similar results in the upcoming years. High equity valuations, historically low credit spreads, and crowded private markets leave little margin for error.

“In general, we anticipate that for all the traditional asset classes we have invested in, we believe we are facing both return compression and likely Alpha compression,” stated Kim Lew, CEO and president of Columbia Investment Management Company.

Lower anticipated returns pose a mathematical challenge. For instance, private foundations are required to disburse approximately 5% of their assets annually. When operational expenses are factored in, the required return increases. “If you don’t achieve returns of 8%, the model fails,” remarked Carlos Rangel of the W.K. Kellogg Foundation, one of the largest philanthropic foundations in the U.S.

This pressure is motivating investment teams to look beyond traditional avenues. Lew noted that achieving outperformance may necessitate venturing “a bit further on the risk curve” and investigating previously untried strategies.

This exploration has, in certain instances, led endowments to the cryptocurrency markets, which were once considered too volatile or operationally challenging for conventional institutions. Early adopters among universities, such as Yale and Harvard, invested in crypto-focused venture funds years ago, gaining indirect exposure to digital assets through private channels. Recently, the approval of spot bitcoin BTC$66,773.01 and ether (ETH) exchange-traded funds in the U.S. has provided a more straightforward investment option.

For instance, Harvard University and Brown University have revealed their holdings in both bitcoin and ether ETFs in their recent 13F filings. Although these allocations are relatively small compared to their overall portfolios, the disclosures indicate that digital assets have transitioned from the periphery of institutional finance to a more conventional status.

For endowments facing reduced expected returns from equities and bonds, crypto ETFs represent a high-risk, high-volatility investment option.

Nevertheless, panelists emphasized that the overarching challenge transcends any individual asset class. Many institutions are moderating their expectations following years of robust market performance. Equity risk premiums appear slim, private markets are burdened with unprecedented volumes of unsold assets, and macroeconomic uncertainty remains high.

“I think it’s a very difficult environment for achieving exceptional returns,” Lew remarked.