Investment Policy at the Hewlett Foundation

Investment Policy at the Hewlett Foundation

Purpose of the case

To provide students with the opportunity to discuss the design of asset allocation policies for long-term investors, the design and implementation of return overlay (or “alpha transport”) strategies, evaluation of performance and risk exposure of hedge fund strategies, portfolio diversification, and investments in non-liquid assets.

Objectives

After completing this case students will understand:

1. Asset allocation design

2. Design of overlay portfolios, also known as “alpha transport” or “portable alpha” strategies, to separate search from alpha from risk exposure.

3. The role of hedge funds in investors’ portfolios

4. Portfolio undiversification

5. The benefits of specialization versus the benefits of portfolio diversification.

6. The use of geometric mean returns and arithmetic means returns as forecasts of expected returns al long horizons.

Case Synopsis

This case examines the asset allocation decisions that the William and Flora Hewlett Foundation (HP) is considering in early 2005. After careful analysis of the financial challenges and investment opportunities the foundation is currently facing, the chief investment officer and his team are about to make three asset allocations proposals to the foundation committee which, if approved will substantially change the foundation’s investment portfolio.

* First Proposal Adopt a new allocation policy to reduce considerably the foundation’s portfolio of domestic equities and instead increase the allocation to absolute return (or hedge fund) strategies and US TIPS (Treasury Inflation Protected Securities). This recommendation is based on a detailed asset allocation study that includes a re-valuation of HF’s long-term projections of capital market conditions.

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