Endowments: "What Would Yale Do If It Were Taxable?"

From the Social Science Research Network:

Abstract:     

The phenomenal success of Yale's endowment has been an inspiration to many investors. However, if Yale’s endowment had to pay the same taxes as individual investors, its portfolio would be constructed very differently. This paper presents a simple model for incorporating tax considerations into a pre-tax asset allocation such as Yale's. With illustrative examples, we demonstrate the profound impact that taxes can have on optimal portfolio weights as well as the interplay between taxes and risk. Once taxes are included our model tends to lower allocations to tax-inefficient asset classes such as hedge funds and increase allocations to tax-efficient strategies. However, with optimal tax management, hedge fund allocation can still be preserved so long as their returns are uncorrelated with those of equity. 

(23 page PDF)