Yale’s Famed Investing Model Falters at a Fraught Time for Colleges

Many copied the Ivy League school’s bets on private equity and other illiquid investments. Now plain old stocks and bonds are outperforming.

Jagdeep Singh Bachher, who oversees the University of California system’s investments, did something quietly revolutionary seven years ago.

He shifted a small piece of the schools’ endowment money away from the typical choices: costly and complicated private equity, venture capital and hedge funds. Instead he invested in old-­fashioned stocks and bonds, through index funds that charge next to nothing.

Bachher started with a couple of hundred million in seed money, and ultimately UC’s campuses allocated $5 billion. The result: UC’s new fund, over the three years ended in June, reported a 15% average annual return, thrashing the performance of some of the richest private schools—most notably Yale University, which pioneered the much-copied model of buying illiquid private investments rather than publicly traded stocks and bonds.

UC’s plain-vanilla Blue and Gold Endowment, named after the system’s colors, has grown to about $8 billion, making it, on its own, one of higher education’s biggest funds. “Keeping it simple, keeping the cost low, and luck is a very important part of this entire approach,” Bachher says.

UC’s strategy shows the travails of the so-called Yale model of endowment investing, which has grown into a kind of orthodoxy since its advent in the 1980s. Its poor recent results have been leading some investment professionals to question Yale’s method, also called the “endowment model,” which is also popular among philanthropies and pension funds. “It’s not dead,” says Mark Steed, who oversees the $24 billion Arizona Public Safety Personnel Retirement System, of the Yale model. “But it’s in critical condition.”

That tactic presupposes higher returns for locking up money for the long term, something most people can’t do. Ivy League institutions are planning in centuries. But it turns out universities in fact need money now.

Some of the wealthiest, including those that benefited most from the Yale model, are on the hook for hundreds of millions in new endowment taxes from a hostile government, led by President Donald Trump, who also withheld billions in federal funding for research—their lifeblood. Yale and Harvard University say the increased endowment tax alone will cost them each some $300 million a year. “In moments of extreme crisis, it is definitely a rainy-day fund,” Leon Botstein, who’s been president of Bard College in Annandale-on-Hudson, New York, for a half-­century, says of the higher education investment pools. “That’s the privilege of having an endowment.”

Now, universities are dumping private equity funds at discounts following years of poor returns, while public stocks have outperformed the asset class. Higher interest rates have made it difficult for investors to exit private equity—or leveraged buyout funds—through public offerings.

Last year, Yale unloaded about $2.5 billion in LBO funds at a discount. Because the university is such an influential investor, the fund sales, its first in the secondary markets, underscored the broader struggles of leveraged buyouts. A firm involved in the sale used a code name: “Project Gatsby,” after the 1925 F. Scott Fitzgerald novel whose narrator graduated from Yale.

PE funds dragged on university returns. Consider Yale. In the three years ended on June 30, its endowment generated an average annualized return of 6.2%, less than half UC’s stock-and-bond fund. It also lagged the performance that would have been achieved investing 70% in a stock-­index fund and 30% in bonds or in a 60%-40% mix. (The last time Yale disclosed its asset allocation in its annual endowment report, in 2020, it had less than 14% in publicly traded US and international stocks, with 60% in LBOs, venture capital and hedge funds.)

Yale is also underperforming other Ivy League schools, its three-year annualized return besting only the 4.3% of Princeton University, another early adherent of the endowment model. The top performer, Columbia University, had a much higher percentage of its portfolio in publicly traded stocks—more than a third during the year ended in June.

Princeton, once a top performer, lagged one of its far smaller neighbors in its home state. The College of New Jersey, a public institution with a $72 million endowment, reported an 11.5% annualized return over the past three years—more than twice Princeton’s performance. The smaller school holds no private equity and has about 60% in stocks and the rest mostly in bonds and cash. (Princeton declined to comment.)

The endowment model has been slipping for longer than several years. In a recent study he co-authored, Jeffrey Blazek, a Neuberger Berman Group money manager who formerly spent 15 years advising endowments and foundations, studied 10 years of data through June 2024 from the National Association of College and University Business Officers. The study notes that the average university fund performed the same as a 70%-30% stock-and-bond mix. “A disappointing decade,” his report calls it.

In the fall, both Yale and Harvard held panels about the endowment model. “Universities have begun to rethink the widely emulated ‘Yale Endowment Model’ investment strategy,” the Harvard forum’s online recap read. (Harvard was also an early adopter of the approach, but it has long struggled for other reasons, among them shifting strategies and management turnover.) “The Yale model that we knew and loved needs an overhaul,” says Britt Harris, who formerly managed the University of Texas and Texas A&M endowments and participated in the Harvard forum. “You need to be there when the school needs the money.”

To be sure, Yale’s long-term record remains stellar, as do those of many that copied its strategy. In the 20 years ended June 2025, the university reported a 9.7% annualized return, the best in the Ivy League, compared with 6.6% from a 70%-30% mix. Before Yale made its private equity sales, its investment office said it remained committed to the sector. “The original story of the Yale Model was one of innovation,” Matthew Mendelsohn, its endowment chief, said in an emailed statement. “We remain unafraid to evolve and confident in our ability to do so while staying true to the long-term, people-­first approach that has always been the core of our identity.”

Mendelsohn is referring to Yale’s strategy of finding the most promising money managers and backing them for the long term. Signaling its commitment, the university in 2024 announced a new initiative, an offer to seed as many as five new funds with at least $50 million apiece. The endowment received more than 2,000 applications in the project’s first year and picked four managers in asset classes across private and public markets. The school calls it the “Prospect Fellowship” program, named for the street of the former location of the investment office.

Mendelsohn took over the endowment in 2021, succeeding the man who pioneered the Yale model: David Swensen, who died of cancer the same year after overseeing the university’s endowment for more than three decades. The fund was worth about $1 billion in 1985 when Swensen started at Yale. Not long after he died, it had reached $42.3 billion.

Yale renamed a tower after Swensen and has described him as perhaps the greatest financial contributor to the university because of the $57.6 billion in investment gains he helped generate. His acolytes left Yale to work for other top performing endowments, including Princeton, Stanford University, the Massachusetts Institute of Technology and Bowdoin College. Other schools hired consultants who encouraged them to adopt the Yale model.

Swensen long warned that his strategies weren’t for everyone, saying all but the most sophisticated should simply index. “Certainly, the game of active management entices players to enter, offering the often false hope of excess returns,” he wrote in his book Pioneering Portfolio Management, published in 2000.

As with many investment strategies, early movers often reap most of the gains, and asset returns decline as the rest of the world piles in. At Princeton, endowment model pioneers backed promising emerging managers who prospered alongside them, says Ted Karns, who worked for 15 years at the university’s endowment and helped oversee venture capital and private equity investments.

“As endowments and those managers grew together—and as we focused on a ‘fewer, better, stronger’ roster—­portfolios naturally became more concentrated,” says Karns, now a lecturer at Boston University’s Questrom School of Business. “Many institutions, including ours, continued to support new talent, but building fresh emerging relationships was harder to do at scale.”

Some colleges are losing patience. About 60 miles northwest of Yale’s home of New Haven, Connecticut, David Ford took over two years ago as chair of the investment committee for the University of Connecticut’s $670 million endowment. He engineered an exit from all but one of its hedge fund managers, putting most of the money in a type of index offering that tracks the S&P 500 and uses options to protect against losses while capping gains. (The endowment also bought Bitcoin.)

The fund is looking to lower its commitment to private equity without selling on the secondary market. “I read Swensen’s book, and I had this epiphany,” says Ford, who has worked in the hedge fund industry. “The model makes sense, but a lot of the asset classes that he identifies as ­alternatives are mainstream. We need to think about hunting for ­something not nearly as crowded or touristy.”

Universities are also looking at different approaches to tapping their endowments for short-term needs. MIT said in November it’s now “rebalancing” funds and covering costs from gifts “while staying true to the donor’s intent.” Universities often can’t dip into their endowments, because donors have placed legally enforceable restrictions on their gifts.

Josh Lerner, a Harvard Business School professor and economist who specializes in private capital, cautions about spending more from endowments, which could end up destabilizing colleges’ long-term finances. “There’s always a crisis,” he says. “Once you go down this line, it can be self-­perpetuating to dip into the till.”

At the University of California, Bachher came to his new approach with the perspective of a former outsider. Raised by schoolteachers in Nigeria, he and his family, who are Sikhs, emigrated to Canada, where he started studying for his bachelor’s degree at the University of Waterloo at age 15. After his graduate studies, he started his career managing money for pensions and endowments. Bachher, 53, oversees UC’s $200 billion in endowment, pension and other money for 10 campuses including UCLA and UC Berkeley.

In establishing his stock-and-bond Blue and Gold Endowment, Bachher credits the insight of another Wall Street outsider, Warren Buffett, the famed stockpicker from Omaha, Nebraska, who nevertheless says the vast majority of people are better off indexing. When he dies, Buffett has instructed that 90% of his wife’s inheritance be put in a stock index fund, with the rest in short-term government bonds. Bachher finds the simplicity of this approach appealing: “Close your eyes, come back 30 years from now, and you’d be in a better position.”

The Blue and Gold fund has some advantages over established endowments. It invests money from the UC schools that place no restrictions on how it can be used. So, in 2021, UC transferred more than $1.7 billion back to its clients, the university’s campuses, to pay for unexpected expenses related to the pandemic.

Another opportunity arrived in February 2025: A prime Silicon Valley property was suddenly available for purchase, the campus of Notre Dame de Namur University, a Catholic college founded by an order of nuns. In September, UC snapped it up for $153 million after another buyer with a four-year option to buy backed out.

The religious school will rent from UC and invest the proceeds in the Blue and Gold fund. Beth Martin, the school’s president, says the institution likes the low fees and UC’s avoidance of tobacco and fossil fuel stocks. “That’s very appealing to a religious order,” she says.

The quick deal showed the benefit of flexibility. Stanford, the erstwhile buyer, said February of last year it was no longer pursuing the property, at a time when it had other priorities. The next day, the university halted hiring, citing financial uncertainties after the Trump administration said it was cutting research funding across the country. Stanford has a more than $40 billion endowment, one of higher education’s largest. —With Jack Witzig and Preeti Singh