* Only Kim Abdullah of Saudi Arabia who recently funded the new King Abdullah University of Science and Technology with $20 billion, has done more for a university anywhere in the world.

* Section 2 of the Uniform Management of Investment Funds Act (UMIFA), which has been adopted in forty-eight states and the District of Columbia as of June 30, 2007, codifies this obligation by requiring that an institution maintain the historic dollar value of an endowment gift. Some states have strengthened this law to include preservation of purchasing power.
In 2006, the National Conference of Commissioners on Uniform State Laws proposed adoption of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which explicitly suggested that states consider preservation of purchasing power when drafting their statutes. As of June 30, 2007, twelve states had adopted statutes based on UPMIFA.

* The simulations assume returns consistent with the average endowment target asset allocation as reported in the 2006 NACUBO Endowment Study, employing a spending rate of 5 percent applied to a five-year moving average of endowment values. The intermediate term spending decline consists of a 25 percent real decline over five years. The time horizon for evaluating purchasing power preservation is fifty years.

* In fact, a significant portion of Yale’s increase in purchasing power results from value added in the investment process. Over the last two decades, Yale’s portfolio increased by approximately $12.4 billion relative to the median result achieved by colleges and universities.

* Call risk represents the risk that an issuer will redeem bonds at a fixed price prior to maturity. Bondholders generally suffer when issuers call bonds, since calls usually occur in an environment in which interest rates have declined.

* Survivorship bias occurs when data exclude markets (or investment funds or individual securities) that disappear. Since lower returning, higher-risk markets (or investment funds or individual securities) tend to fail at a higher rate than their higher-returning, lower-risk counterparts, the sample of survivors describes an environment that overstates the real world return and understates the real world risk.

* A phenomenon of the early 1970s, the “Nifty Fifty” consisted of approximately fifty high quality growth stocks. Investors believed these securities faced such extraordinary prospects that some called them “one-decision” stocks, the decision being when to buy since selling was out of the question.

* Yield curves represent graphically the relationship between yield and term to maturity for bonds with the same credit quality. Normal yield curves slope upward with higher yields for longer maturities. Flat yield curves reflect constant yields, regardless of maturity. Inverted yield curves depict environments where short-term rates exceed longer term rates.

* In a normally distributed variable, a one standard deviation event occurs approximately one out of every three trials, a two standard deviation event occurs one of every twenty trials, and a three standard deviation event occurs one out of 100 trials. An eight standard deviation event occurs once every six trillion years, based on a 250 business day year. The frequency of a 25 standard deviation event defies description.

* Estimated survivorship bias impact represents the difference between: (a) the linked annual median manager returns with survivorship bias; and (b) the linked annual median manager returns without survivorship bias.

* Execution of the Samsung corporate bond arbitrage required a short sale of the relatively expensive dollar bonds. Short sellers must borrow bonds to consummate the transaction. One risk in executing the arbitrage lies in losing the “borrow,” causing the investor to unwind the short position prematurely. In well functioning capital markets, maintaining short positions poses little problem; however, in well functioning capital markets nearly identical streams of cash flows (as represented by the Samsung hedged yen and dollar bonds) do not trade at substantially different prices.

* Normally distributed variables generate a four standard deviation event once every 15,780 trials. Based on a 250 day year, a four standard deviation event occurs once every 63 years.

* Excess return, or alpha, represents the risk-adjusted incremental return for an active strategy relative to the benchmark. For the ten years ending December 31, 2006, top quartile equity managers beat the median by 2.6 percent per year according to data compiled by Frank Russell Company. See p. 188 for a more complete discussion of value added by long/short investing.

* A more complete discussion of the relationship between stock returns and inflation is included in Chapter 10.

* The simulation process also proves useful in evaluating spending policies. By keeping constant the investment portfolio, various spending rates and averaging processes might be tested.

* Even though with an unlevered portfolio Askin may not have gone out of business, without leverage Askin never would have been in business. Leverage boosted the underlying returns on his strategy to the mid-teens level necessary to attract investment capital.

* The 203-year history reflects the 200 years of data in Siegel’s Stocks for the Long Run, grown by the three years of subsequent returns in Ibbotson’s data set.

* See Chapter 4 for Ibbotson’s and Siegel’s stock and bond return data.

* A price-earnings ratio measures valuation by comparing a company’s stock price per share to its earnings per share.

† A price-book ratio measures valuation by comparing a company’s stock price per share to its book value (assets minus liabilities) per share.

* The term duration was first used in 1938 by Macaulay, who developed a formula to measure the average economic life of a security. Duration constitutes a weighted average of the proportions of the present value of the expected cash flows from a bond, with each payment weighted by the period in which the payment is expected to be received.

* Yield to maturity represents the rate of return anticipated by holding a bond to its maturity date.

* Absolute return strategies that employ offsetting long and short positions (merger arbitrage and long/short investing) earn money market returns in the absence of manager value added (or subtracted). On one side of the portfolio, assume a manager invests contributed funds in long positions. On the other side of the portfolio, assume a manager executes a short sale. Upon consummating a short sale, the manager receives cash proceeds from the transaction. Even though the cash must be posted as collateral with the lender of the security, the short seller earns a “rebate,” or money market rate, on the proceeds. If the long position and short position both track the market precisely, gains (losses) from the long match losses (gains) from the short, eliminating the systematic market factors from performance. Under such circumstances, the investor earns the money-market-like short rebate on invested assets.

* The story of Farallon Capital Management’s handling of the MCI Communications/WorldCom combination appears in Harvard Business Case N9-299-020, “Farallon Capital Management: Risk Arbitrage,” written by Robert Howard and Andre Perold in February 1999. The case study describes the ultimately successful efforts of Tom Steyer, David Cohen, and Bill Duhamel in navigating the complexities of an extraordinary merger transaction.

* Russell/Mellon Analytical Services produces the manager data used in this section. The Russell 3000 provides the passive benchmark employed to measure relative performance.

* Begin with a gross return of 8.9 percent. Subtract the 1.0 percent management fee, leaving a 7.9 percent return. Take a 20 percent profits interest (0.2 x 7.9 = 1.6) from the remaining return, producing a 6.3 percent net result.

* The Sharpe ratio, a measure of excess return generated per unit of risk, for Yale’s absolute return portfolio amounted to 1.8 over its seventeen-year life. In contrast, passive investments in domestic equities and fixed income posted Sharpe ratios of 0.9 and 0.7, respectively, over equivalent periods.

* Data cover the period from May 2004 to December 2006.

* Peter Guber and Jon Peters, the former co-chairmen of Sony Pictures Entertainment, had lavishly appointed offices on the top two floors of the building. Rumored to have cost hundreds of dollars per square foot, the improvements were included as part of the purchase price.

* For the period from 1960 to 1986, Hancock estimates the index return based on known price data and assumptions about forest growth and characteristics. Index returns from 1987 onward are calculated by NCREIF based on the performance of actual timberland properties. The return series beginning in 1987 is officially called the NCREIF Timberland Property Index. Performance in early years depends on critical assumptions about forest characteristics. The more recent property-based index reflects the returns on a limited number of properties.

* One third of the United States is classified as forestland. Two thirds of forestland is classified as timberland.

† Estimated by PricewaterhouseCoopers and the Urban Land Institute in 2005. The $3.5 trillion figure excludes single family and owner-occupied residences, as well as corporate, nonprofit, and government real estate.

* Stumpage is the right to cut standing timber.

* The sample for the buyout study contains extraordinary survivorship bias. The data employed came from offering memoranda provided to the Yale Investments Office by firms hoping to attract Yale as an investor. Needless to say, only firms with successful track records came calling on the university, hoping to attract funds. A further potential source of bias stems from consideration of only completed transactions, since more successful deals might achieve early liquidity while the walking wounded might linger in buyout portfolios for years. Lacking reasonable valuations for private companies remaining in fund partnerships necessarily limits the study to those investments that exited with a sale or public offering and those that departed with a bankruptcy or liquidation.

* The sale of an affiliate reduced assets under management by $200 million.

* Barclays Global Investors estimates that in recent years 60 percent to 70 percent of the firm’s S&P 500 equity index fund transactions represented crossing trades. Such internal trades create no market impact and require no commission payments.

* *Barclays Global Investors’ fee schedule for the S&P 500 Index Fund starts at 7 basis points on the first $50 million, moves to 5 basis points on the next $50 million, and ends up at 2 basis points for amounts over $100 million. A basis point is 1/100 of 1 percent.

* My 2005 book, Unconventional Success: A Fundamental Approach to Personal Investment, covers the investment issues faced by investors without the resources to pursue active management programs.

* For example, consider the Bloomberg Football Index, an index of companies that own or operate English and Scottish football clubs.

* Yale’s security lending operation, managed much more conservatively than The Common Fund’s, pursued a matched book strategy. That is, maturities of security loans matched maturities of investments, with the university generating returns by accepting credit risk in the reinvestment vehicle. Prompted to examine the issue by the PricewaterhouseCoopers study, Yale concluded that spreads were too thin to justify continuing the security lending operation. The Common Fund, motivated by the thin spreads in a matched book operation, took significantly greater risk in an effort to generate a meaningful return. See Chapter 6.

* A put option allows the put holder to sell a security at a fixed price during a specified period of time. If a bond issue contained a put option, the purchaser would enjoy the right to sell the bond (or put the bond) to the issuer at a fixed price during the period of time specified in the bond indenture.

* If corporations enjoy superior access to debt financing, either because of creditworthiness or tax advantages, then the value of the corporation may be enhanced by increasing balance sheet leverage.