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$19 Billion Endowment Fund Thinks This Alternative Investment Will Outperform Stocks

University endowment funds are among the best managed investments in the country. Yale offers an example of one of the best run funds and the managers recently made a dramatic shift in their asset allocation model. Individual traders should consider following Yale's lead.

Large universities often depend on investment returns to fund significant parts of their operating budgets. In the case of Yale, more than a third of the university's $2.8 billion annual budget is covered by gains from the investment fund. In the past 20 years, the fund has been able to support the school with annual returns averaging 13.7%, more than twice the 6.4% average return of the S&P 500 index.

From detailed annual reports, we can learn how the fund did so well. Over that time, the university moved away from a large investment in U.S. stocks to a more diversified approach. In their most recent annual report, Yale indicated that only 5.8% of their assets are invested in U.S. stocks.

While reducing exposure to the U.S. stock market, Yale has shifted money into private equity. In the past five years, private equity investments have grown from 20% of the portfolio to more than 35%. Yale's investment managers believe these investments will deliver an average annual return of 10.5% in the next few years. They are looking for gains of about 6% a year from U.S. stocks and 7.5% a year from foreign stocks.

David Swenson, Yale's Chief Investment Officer and the individual most responsible for the fund's long-term performance, said he believes individuals should use ETFs for exposure to alternative investments because individual investors don't have access to the same experts or resources that Yale has. This is especially true with an asset class like private equity where the best funds may require minimum investments of several million dollars.

PowerShares Global Listed Private Equity (NYSE: PSP) is an ETF that individual investors should consider as a possible cornerstone investment in their portfolio. It is also an ETF that presents a short-term trading opportunity right now.

PSP Fund Chart

The weekly chart highlights the relative strength (RS) of this private equity ETF. With a RS rank of 95.6, PSP is one of the strongest investments in the market over the past six months, and buying strength has been shown to be a successful trading strategy in a number of studies. The monthly chart can be used to define the trade signals.

PSP is at the upper Bollinger Band on the monthly chart, which is also a sign of strength when momentum indicators like the stochastics are not excessively overbought. The last time PSP reached the upper Band, shown with the blue box on the monthly chart, the ETF gained about 17% over the next five months as the stochastics indictor moved steadily higher. PSP could see a similar move from its current price.

Over the long term, a period of three to five years, PSP could trade as high as $18 a share, which would be in line with the targets established by Yale's investment managers. To participate in as much of that gain as possible, traders should continue using the 10-month moving average as a sell signal. That average is currently at $9.42, about 12.5% below the recent price. For a long-term position, this is not an unusually large stop.

Students spend more than $58,000 a year to attend Yale thanks largely to the university's investment managers. If the school was unable to count on nearly $1 billion a year in investment income, tuition would likely be even higher. Traders can also benefit from the expertise of Yale's investment managers, and a private equity fund ETF like PSP should probably be a part of a core portfolio.

Recommended Trade Setup:

-- Buy PSP at the market price
-- Set initial stop-loss at $9.42, and continue using the 10-month moving average as a sell signal
-- Set initial price target at $12.60 for a potential 17% gain