(Bloomberg Opinion) -- Thewhy was the deck of cards always in trouble bears have been ascendant in the stock market lately. Some other Bears have also been victorious of late — in the Ivy League numbers game.

There are few more influential investors than the endowment funds of the Ivy League universities. Harvard and Yale have the world’s two largest endowments, at more than $30 billion each as of last June. All have the huge advantages that come with being able to bear illiquidity risk, and Yale’s move into hard-to-trade, buy-and-hold assets under David Swensen — which started some three decades ago now — continues to be hugely influential throughout the world of asset allocation. It has spurred investments into hedge funds, illiquid real assets such as forestry, and particularly private equity.

So it is disquieting that the Ivies had a bad year last year (they all have a financial year that ends on June 30), and that the source of the problem seems to be their illiquid assets. According to Markov Processes International, seven of the eight Ivies failed to match the returns of a simple 60/40 portfolio, that is weighted 60% in stocks and 40% in bonds. The only one to do better was Brown University (whose sports teams are nicknamed the Bears). Its $3.9 billion fund returned 12.4% in the period, compared with the 9.9% gain netted by 60/40 allocations.

Why, though? Both private equity and venture capital outperformed public equities and bonds during the 12 months ended last June. This is when it gets strange. As the chart shows, by Markov’s estimate, several of the eight Ivy endowments had huge allocations to both venture capital and private equity, led by Yale and Princeton. Brown’s allocation to them was in the middle of the pack. Hedge funds had a bad year, and Brown’s allocation to them was lower than some, but not by a lot:

Markov’s next step was to try to attribute how much each asset class contributed to performance. Basically, this can be done by taking the percentage allocation to an asset class, and multiplying it by the overall return for that asset class. If the total arrived at by this exercise differs from the actual return achieved by the endowment, the remainder can be explained by “selection” — essentially an asset allocator’s equivalent of “alpha.” The portion achieved by selection is the portion that shows the endowment managed to add or subtract value with its choices within asset classes. In the case of the Ivies, this analysis reveals the remarkable conclusion that Brown was the only one to add value to its endowment with its selection of investments last year. All the others — universally staffed by formidably intelligent people — made selections that lost value:

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First, everyone should congratulate the Bears. They look very clever. But second, how was it possible for so many endowments to make bad choices among private equity and venture capital funds? The following chart from Markov suggests that it is down to outlandishly wide variations in performance within the private equity/venture capital world. The underlying investments are mid-cap companies, and so their performance should at least be similar to mutual funds holding public mid-cap equities. But the variation in performance is vastly wider, and far more likely to be negative, than for public mid-cap equities. And it grew very much wider last year:

A working hypothesis, then, is that a lot of very plausible private equity managers did a really awful job of managing the money entrusted to them by charitable endowments last year. How did this happen? I suspect that the field has grown overcrowded, to the point where even the Ivy League’s endowment managers can’t tell the generally skillful private equity investors from also-ran operators. I also begin to suspect that Yale’s great returns in the early years of its embrace of private markets may have owed a lot to first-mover advantage. There were only a few private equity managers around, seeking deals in sensibly priced markets, and Yale ensured that it found the best. They did what every good investor should do: They spotted an under-appreciated opportunity and leaped on it. Now, those opportunities have evaporated.

Michael Markov, who co-authored the report, suggests that it is a cautionary tale, as individual investors are now increasingly also looking for ways to enter private equity. “Even the most sophisticated investors with access to elite managers aren’t immune from potential performance downturns and can suffer in a year that was, on average, good for private markets,” he says. “At a time when the amount of dry powder waiting to invest in richly valued markets sits near historic levels, it could be wise for investors to scrutinize private markets deals, managers and portfolios with renewed diligence.” Endowments are complicated and deal in opaque investments, so other factors may well be involved. Last year might yet turn out to be a fluke. But these are important issues, which the private equity and venture capital industries must address. Having said all that, congratulations to the Brown Bears.

To contact the author of this story: John Authers at [email protected]

To contact the editor responsible for this story: Beth Williams at [email protected]

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.

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