Endowment managers at other universities have long wondered how Chief Investment Officer David Swensen has consistently generated returns above Yale’s peers. Now, they may have a little bit more insight.
In a New York Times profile published last Thursday, former Yale Investments Office analyst Zhang Lei GRD ’02 SOM ’02 chronicled his journey from interning under Swensen to managing one of the world’s most successful firms, Hillhouse Capital Group. The firm, which Zhang founded in 2005, now controls over $18 billion.
It is no coincidence that Zhang named his firm in honor of the street that runs through Yale’s campus. Just three years after Zhang graduated, the University became one of his earliest backers, “seeding” $20 million in capital when Zhang first solicited investments — a decision that underscores Yale’s willingness to seek out unconventional sources of opportunity.
“I actually had no investment experience at all prior to the internship,” Zhang said. “By working there, that really helped me get to the fundamental core of what really is an investment, and that made me always ask what is really the essence of investing versus what is the noise.”
Zhang added that even after Yale agreed to invest with Hillhouse Capital, he was initially hesitant to charge the University on the terms of the contract since “we just started and I felt we hadn’t proven ourselves,” he said. It was only after YIO Senior Director Dean Takahashi ’80 SOM ’83 personally called and insisted that he begin charging the University that the true business partnership between Hillhouse Capital and Yale began.
Zhang described his investment philosophy as a combination of “Swensenism” — a term inspired by Swensen’s philosophy of “unconventional wisdom”— and traditional Chinese Buddhism. He added that during his time at YIO, he learned the importance of identifying genuine talent and focusing on the fundamental questions.
“You can see that by the time [the YIO] got to the point of making [that] investment, they already likely knew him very well because he worked there and so on,” said William Jarvis ’77, managing director of the Commonfund Institute. “So the due diligence — if not already done — the hard lifting about the character of the person, how they look at things and so on was in some ways already taken care of.”
The YIO declined to comment.
Swensen, Zhang’s former supervisor, emphasized in his 2000 book, “Pioneering Portfolio Management,” the importance of avoiding “comfortable investments” that place name recognition above the character of an individual money manager.
“Because entrepreneurial firms tend to be newer and smaller, track records may be harder to define and interpret.” Swensen wrote. “While backing an entrepreneurial group takes more courage than serving up a ‘name brand’ recommendation, investment success may require backing managers without standard institutional credentials.”
After leaving Yale, Zhang worked for a hedge fund based in Washington that focused on emerging market investments. But with only limited working experience outside of the YIO, it is clear that Zhang was not a traditional pick for a $20 million investment — even from an endowment with $15 billion at the time. However, with Hillhouse Capital consistently producing double-digit annual returns, Yale’s risk has paid off.
But more than the success of one fund manager, this decision also highlights the way in which alumni of universities and their endowment offices can uniquely benefit from maintaining mutual ties, even when thowse alumni are not the direct recipients of investments.
MIT Finance professor Andrew Lo ’80 said that leveraging the skills and investment knowledge present in the alumni community is not a new phenomenon.
“I think it is an advantage because alumni are quite loyal to the university so they have additional motivation for participating in supporting the endowment activity,” Lo said. “We have seen this not only at Yale, but at other universities as well, where if you look at the investment committee of endowments, they are populated with alumni who are talented in the investment industry and are willing to give their services and expertise.”
He added that Swensen uniquely cultivates this type of relationship among Yale alumni and particularly members of the YIO, as he has an ability for identifying skill and mentoring those individuals for success both within and outside the office.
Jarvis said developing this type of “network effect” is one of the key features that distinguishes Yale in identifying interesting opportunities and is often one of the hardest things for other institutions to replicate.
“It really is dependent on who your network is and if you have got a network of really creative, well plugged in people, they will be able to bring you [investment] ideas,” Jarvis said.
Still, there is a fine line between tapping the skills and access of those affiliated with universities and creating business relationships that can questioned for non-financial motives.
Most notably, Dartmouth College faced controversy in 2013 for the number of investments placed with trustees of the university. At the time, 13.5 percent of its assets were in funds managed by trustee-affiliated firms. As a result, a group of anonymous individuals wrote a letter calling upon officials to investigate whether these types of investments could be characterized as conflicts of interest.
Though Yale does not disclose the percentage of its endowment invested with alumni of the school, Lo said that these types of business relations are not a major concern at Yale and among peer institutions.
“I think these relationships have to be managed carefully, but given the professionalism in the endowment world, I don’t see this as a big issue,” Lo said. “There are many examples of Harvard Management Company giving birth to a number of alumni that have continuing productive and positive relationships with HMC, so that is an example where this kind of potential conflict can be managed, and more importantly, allows the endowment to leverage this experience and knowledge base.”