These investment selections paid off, yielding a 49.5 percent return, placing it among the top three returns of colleges and universities in the country. The school's endowment grew from $634 million to $912 million.
But alternative investments, which include real estate, venture capital, buyouts, absolute return funds, high yield bonds and oil and gas, are widely considered to be the riskiest asset classes. These asset classes have recently been the focus of substantial investment from colleges and universities. So, to what risks did the College and its peer institutions expose themselves by investing in these areas?
"Venture capital is, in isolation, riskier than the S&P. That's true," said Trustee Peter Nadosy, who chairs the Investment Committee of the Board of Trustees. However, he emphasized that the College's investment portfolio is diversified, meaning that Amherst invests in many different areas, some relatively conservative like the S&P 500 and some more risky.
"I do believe that venture capital and private equity is a superior long-run returning asset class that clearly makes sense for endowments," added Professor Paul Gompers of Harvard Business School, who studies and teaches venture capital theory.
"I think we had our necks out less this way," Nadosy said. "By diversifying, we felt that we were reducing the risk. What we try to do is to have different asset classes that move in different directions at the same time."
Gerety added that "not taking calculated risks is in a sense more risky." He said of the College's investment choices, "I think, in fact, we've been very prudent."
"The College only invests in proven, successful venture capital funds," said Treasurer Sharon Siegel.
Professor of Economics Geoffrey Woglom, who teaches a class in the economics of finance, said a high return, such as the one Amherst and many other colleges with similar investment portfolios received for the 2000 fiscal year, "could be a reflection of a risky portfolio."
These assets seem risky because, where some years will be very good, "some years will be very bad," Woglom said. He emphasized that these ups and downs in returns on the endowment investment are "not necessarily a bad thing."
Indeed, the recent downturn of the markets suggests that the endowment's good fortune is unlikely to keep up its current pace.
"The returns from the last year are not expected to continue," said Siegel.
"I suspect November was poor," added Nadosy, adding that Amherst's alternative investment performance was certainly "no worse than the S&P."
"I'm much more comfortable sleeping this way," he said. "I think it's a lot less risky strategy.
Venture capital and other alternative investments, while seemingly volatile, may have attenuated effects on an endowment fund because the majority of the fund remains untouched over many years. The fund can more easily absorb financial valleys and peaks.
Woglom described this new investment philosophy. He pointed specifically to David Swensen, the chief investment officer of Yale University, as the principal developer and advocate of creating investment portfolios that include a larger portion of alternative investments.
Woglom pointed out another component of the Swensen investment strategy. "In addition to risk, what also matters is the liquidity of the market," he said. Liquidity is the extent to which an investor can cash in his investments at any given time. There is a trend in the market that funds which are riskier tend to be less liquid.
Venture capital, for example, has zero liquidity in that an investor cannot realize her returns until the company she invested in goes public which could happen immediately, in a number of years or not at all.
Woglom described the Swensen philosophy as an investor "paying for liquidity." That is, an investor realizes fewer gains when she can access those gains more readily.
Colleges and universities do not need to cash in their endowment investments often and, when they do, they cash in amounts smaller than the portion allocated to non-liquid investments. Thus, having a large portion of less liquid investments allows the college or university to avoid paying a premium for liquidity.
Data from the 1999 NACUBO Endowment Study ranks more than 300 colleges and universities by average annual compound return percentage. The schools are ranked in code and each is assigned a number.
According to the 1999 NACUBO Study, over the 10 years up to 1999, Amherst ranked 156 out of 333, 173 out of 411 over five years, 151 over three years and 19 out of 437 over the 1999 fiscal year.
Siegel stated that Amherst's rank should significantly increase when the similar statistics for the 2000 fiscal year are released in January. This increase, even for 10-year and five-year statistics, will be due in large part to the College's well-above average returns for the 2000 fiscal year.
"Amherst's performance should reflect that growth … You can't ignore it," Siegel said.