While most university endowments took a hit in 2008, the richest managed to eke out a positive return on the year. Their secret? A blend of alternative investments like private equity M&A funds, real estate, oil and gas, and even distressed debt, combined with a relatively smaller investment in domestic equities. The Commonfund Institute reveals that other universities tried to play the alternatives game as well, but invested far more in a bucket of alternatives that includes derivatives and hedge funds. Endowment funds with the least to lose, those with under $10 million in assets, though they invested relatively little in alternative strategies, put most of it in this arguably riskiest category. Funds with over $1 billion in assets, meanwhile, spread their investments far more evenly across alternative strategies.

So what's the lesson? Are the investment pros at Harvard, et al. simply smarter, wiser, or luckier? Given that the 3- and 5-year returns at top university endowments also outpace the pack, maybe it doesn't matter. As Milton Friedman would say, what matters is the predictive power of the model. So I wonder if smaller colleges might be better off paying the big funds a fee to do their investing for them. I suspect unloading the bulk of their less effective endowment staff would more than pay for it.