The Downside Math Every Endowment Committee Should Know

Adapted for endowment and foundation boards from Chapter 10 of The Single Family Office by Richard C. Wilson.

A fund that makes 60% in a year looks great. A fund that loses 60% needs to make 150% just to get back to even.

That one piece of math came up again and again with the CIOs I interviewed for the book. One of them made the point that families overweight the big up years and underweight the down years when they look at managers. Endowments do the same.

The recovery table

LossGain needed to break even
10%11%
20%25%
30%43%
40%67%
50%100%
60%150%

The deeper the hole, the harder the climb. And an endowment keeps spending while it climbs.

Spending makes it harder

An endowment pays out each year, often 4% to 5.5% of its value. NACUBO's FY2025 public tables show an average effective spending rate of 4.9% across reporting institutions. That spending doesn't stop in a bad year. So a portfolio that falls 30% and keeps paying out has to earn well over 43% to get back to where it started.

What one CIO did about it

One CIO I interviewed described a rule from his time at a large macro fund. Take most of the risk off when down 20%, because a 25% recovery is realistic. Falling twice as far makes recovery much harder.

Endowments don't trade like that. But the lesson carries. Know how deep a loss your spending policy can survive, and build the portfolio so you don't go past it.

Questions for the committee

  • What is the largest drop our portfolio could take in a bad year?
  • Could we still fund spending, capital calls and operations through it?
  • Which managers protected capital in their worst year, and which didn't?

Frequently asked questions

Does this mean endowments should avoid equities?

No. Most endowments hold mostly equity and equity-like assets. The point is to know your downside and plan for it.

How do we measure downside risk?

Common tools include maximum drawdown, downside deviation and stress tests based on past crises.

Do hedge funds solve this?

Some help. Results vary widely by manager. Judge each one on its own record in down markets.

Sources

  1. The Single Family Office, Chapter 10, Richard C. Wilson .
  2. NACUBO-Commonfund Study of Endowments, FY2025 public table, effective spending rates: https://edge.sitecorecloud.io/nacubo1-nacubo-prd-dc8b/media/Nacubo/Documents/EndowmentFiles/2025-NCSE-Public-Tables--Spending-Rates-FINAL.pdf

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Endowments.com is a research resource on university, college and foundation endowments. It profiles 775 endowments, including university, college, foundation and hospital endowments, built from each institution's own reports and public filings, and runs the Endowments by Size Band benchmark study. Every figure carries its source and date.

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