Endowments in Paradise: Were Universities Hiding or Chasing Returns with their “Paradise Papers” Investments?
In November 2017, a leak of a huge amount of financial documents occurred, which came to be known as the “Paradise Papers.” This name was based on the largely Caribbean tax-and financial-reporting havens where banks, law firms, and financial institutions which had opened up huge numbers of accounts for a range of wealthy-individual and institutional investors were based. Many of these investors owned accounts set up outside of their home countries to minimize their tax payments, and included with them were university endowments*.
An upcoming paper by Gregg Fisher, Yuxiang Jiang, and Cristian Tiu examines both the potential reasons why universities invested in these offshore investments, and their investment results in doing so. Did these educational endowments seek to “hide” poor-performing, socially objectionable, or tax-inefficient investments within these structures, or were they simply seeking equity and alternative-asset managers based in these countries and locales?
If university endowments use offshore accounts to hide investments with poor returns, then, given the “bad” nature of these investments and the costs necessary to set them up, it would be expected that these endowments would underperform their peers. If, on the other hand, endowment managers invest in offshore funds because these are the best funds available in their asset classes, those endowments should show above-average returns in their (for example) private equity returns. Finally, university endowments that invested in Paradise Paper-like investments may simply have been seeking performance, and consequently took more risk, not shying away from even the “headline risk” of bad press should those investments be made public. If this is the case, we expect the Paradise Papers’ endowments to outperform.