Global Markets Bear and Back Again

This year began with a steep drop in stocks around the world. But since February, worries about China, oil prices, and global recession have eased, and stocks have almost returned to where they started 2016. +4.6% -0.6%

and policy analysis for the National Association of College and University Business Officers, which helped collect the data. For an endowment starting with $200 million, the difference adds up to $36 million over that time.

Executing the Yale model requires skill, but also relationships with managers of hedge funds and other socalled alternative investments. That makes it hard for other schools to catch up. “You can’t go back 20 years and build those relationships,” says Karl Scheer, chief investment officer for the University of Cincinnati’s fund.

Many of the best alternative portfolios are unavailable simply because they’re closed—not taking new money. “There aren’t a thousand good buyout funds,” says Erik Gordon, a professor of business and law at the University of Michigan. “There aren’t a thousand good VC funds. You have to find them, and you have to get in. The playing field tilts toward the endowments that are the biggest and the ones that got into alternatives early.”

It doesn’t help that hedge funds often come at a high cost. On top of annual fees of about 2 percent, funds may take a share of any profits earned.

The investment policy at Muhlenberg College’s $257 million endowment calls for 20 percent of assets in hedge funds. Kent Dyer, the endowment’s chief business officer, isn’t sure whether that strategy has paid off. Over a decade, the endowment has earned an annual 5.7 percent, vs. 6.2 percent for those of similar size. “I can remember years back, all the finance and investment committee discussion before dipping into hedge funds,” he says. “Are these higher-fee vehicles doing us any favors?” �Janet Lorin “Focus Five,” which generate the biggest trading commissions for Citi: Millennium Management, Citadel, Surveyor Capital, Point72 Asset Management, and Carlson Capital, according to someone with direct knowledge of the list. These prized firms get pretty much whatever they want from the bank, part of a move on Wall Street to prioritize the most lucrative clients. Citi offers them its best ideas for trades, hourslong phone calls with its analysts, intimate soirees with executives of companies Citi covers, and customized trading models, say people with knowledge of the bank’s practices. Analysts must keep in touch with these customers regularly.

In all there are fewer than 100 firms on Citi’s list, ranked by how much each contributes to the New Yorkbased bank’s revenue, says the person familiar with the roster, who asked not to be identified discussing internal matters. The list was winnowed down earlier this year. Analysts are discouraged from spending time with firms that aren’t on it. A Citigroup spokesman says the bank doesn’t comment on its relationships with clients.

Citi’s not alone. Struggling for profits as they manage stricter regulations and rock-bottom interest rates, investment banks are focusing their businesses around the wealth and influence of the world’s ultraelite— call it the 1 percent of the 1 percent. Even on Wall Street, the divide between the privileged few and everyone else is growing.

One manager at a Wall Street firm, who declined to speak publicly for fear of reprisals, says she doesn’t even bother calling up top analysts at major banks. She’s come to understand that her company doesn’t have the pull to get her calls returned, even though it manages billions of dollars.

The favoritism isn’t limited to equities research. Citi keeps lists of accounts across its business, ranked by assets or trading value, says another person with knowledge of the bank’s practices. Some favored clients are identified by “platinum,” “gold,” or “silver” status. The credit research desk has a priority list of major fund companies that buy bonds. In a postearnings conference call in January, Chief Executive Officer Michael

Emerging-markets stocks have led the

rally The bottom line College endowments face low returns in the short run. In the long run, there remains a big gap between haves and have-nots.