Our consulting group worked with a university Foundation that had a few clear priorities:
→ Meet long-term return targets (CPI +6%) with measured risk.
→ Harvest better gains after a multi-year rally in public equities.
→ Elevate investment governance to align with institutional best practices.
→ Build a portfolio that could withstand market drawdowns while remaining flexible enough to invest opportunistically if markets corrected.
What We Found
We conducted a comprehensive portfolio review, focusing on liquidity modeling, downside scenario stress testing, and risk factor diagnostics.
The initial portfolio review highlighted areas where incremental improvements could materially strengthen outcomes:
• Heavy concentration in high-volatility equities (notably large cap tech and small caps).
• An overweight to private equity, affecting overall portfolio liquidity and limiting flexibility for future allocations.
• A few active managers whose performance was lagging or too volatile.
• A crypto allocation that had grown meaningfully due to price appreciation, adding disproportionate portfolio risk.
• Limited downside protection against broad market downturns.
Our Strategy
We advised the Foundation’s staff and subcommittee on a simple, effective rebalancing plan. Key actions included:
1. Rationalizing Active Manager Allocations
All active equity managers were rebalanced to uniform portfolio weights. This kept the strongest managers, added diversification, and eliminated outsized bets on underperformers.
2. Fortifying Liquidity
We redirected proceeds from hedge fund redemptions and excess cash into core fixed income ETFs, increasing fixed income allocation from 8% to 15%. This created a bigger liquidity cushion for future private capital calls and made the portfolio more resilient to volatility.
3. Calibrating Crypto Risk
The Foundation’s cryptocurrency exposure was trimmed to a smaller target allocation via regulated, liquid ETFs, maintaining potential upside while significantly reducing volatility.
4. Embedding Downside Protection
We took profits on passive equity exposures (QQQ, EFA) and redeployed a significant portion into hedged equity positions. These positions maintain equity upside but cap downside risk at ~15%, making the portfolio much more asymmetric.
5. Reinforcing Governance Architecture
We helped formalize the investment committee’s decision-making process, aligning it with institutional best practices and ensuring future allocations and manager evaluations followed a transparent, repeatable process.
6. Improving Stress Test Outcomes
Scenario modeling showed that the new portfolio design reduced expected drawdowns by about 2%, helping preserve more value — roughly equivalent to the Foundation’s entire annual operating fee base.
Outcome
The rebalancing created a stronger portfolio with:
Enhanced resilience: Better downside protection without sacrificing return potential.
Institutional discipline: A governance model built to support repeatable, high-quality decisions.
More liquidity: Flexibility to act in market dislocations and meet capital calls.
Simplified oversight: Streamlined, transparent portfolio construction aligned to internal committee processes.
