Evaluating and Recommending Changes to an Endowment Fund's Asset Allocation

A prominent university recently conducted a review of its endowment fund, which has a significant portion allocated to alternative investments. The fund is currently valued at $1 billion, with a target allocation of 30% to private equity, 20% to hedge funds, and 15% to real assets. The remaining 35% is allocated to traditional equities and fixed income. The university is concerned about whether its asset allocation aligns with its spending policy and long-term financial goals, which include funding scholarships and maintaining its infrastructure.

As a senior portfolio manager for the university’s endowment, you have been asked to assess the current asset allocation strategy, considering the unique spending needs of the foundation, the risk tolerance associated with alternative investments, and the overall market environment. Additionally, you should evaluate the effectiveness of the current managers of the alternative investment portfolio and recommend any necessary changes or adjustments to the investment policy statement (IPS). Your response should articulate your reasoning and include quantitative analysis where relevant.