Reggie Sanders
At times of significant change, there is a temptation to rip up the rule book. We often fight today’s battles with yesterday’s tools, and, when those tools seem inadequate, we discard them rather than expand our tool kit.
Throughout my career, David Swensen’s Yale Model has been a guiding star. Swensen taught long-term investors to embrace equity-oriented portfolios, seek world-class active managers and capture the illiquidity premium of private assets. The model transformed endowment investing and delivered exceptional results.
Yet, today’s investment landscape is more complex, interconnected and liquidity sensitive. Competition for alpha is greater, market cycles move faster, and pressure on institutional balance sheets is rising. Alternative investments are no longer alternative; they are table stakes.
The goal is not to replace the endowment model but to build upon it. While its results have been impressive, the Yale Model can limit flexibility. Having capital committed to private investments makes implementing tactical opportunities and strategies such as portable alpha harder. In rapidly changing markets, long-horizon portfolios can become less adaptable when flexibility is needed most.
From Asset Classes to First Principles
Before joining the Kellogg Foundation, I ran portable alpha strategies, hedge funds and privates for Eastman Kodak’s pension plan. I was a generalist across asset classes. That experience taught me something vital: When your mandate spans every asset class and instrument, you need a common language that cuts through labels.
This realization has resulted in the framework that I explain in this article. A framework that has yielded strong results: Over the five years ending December 2025, the hedge fund portfolio of the W.K. Kellogg Foundation compounded at roughly 10% a year with an annualized volatility near 3%—the long-run return of equities delivered at a fifth of their volatility—and recorded a positive return in every one of those years.
When I was first tasked with restructuring the Kellogg Foundation’s hedge fund program after we moved from a generalist to specialist model, I went back to first principles and broke down what drives returns and risk. I call these principles DEAR: Diversification, Efficiency, Asymmetry and Risk. DEAR provides a common language for comparing strategies across public markets, private markets and hedge funds.
I think of the four components this way:
Diversification: The key question is: “Will adding this exposure give the portfolio more ways to win?” In investing, a highly diversified manager has multiple return drivers rather than relying on a single market beta. A hedge fund that can make money through equities, credit and macro trades has breadth. A portfolio of managers with independent return streams is not tied to one economic outcome.
Efficiency: Efficiency is the quality of a strategy’s returns, often measured by the Sharpe ratio. An efficient strategy makes the most of its risk budget. At the Kellogg Foundation, we favor managers that generate strong risk-adjusted returns and squeeze more return from each unit of volatility. Over time, those efficiency gains compound, leading to championship-caliber results.
Asymmetry: This refers to a strategy’s upside/downside capture. Positive asymmetry means capturing more upside than downside. We seek strategies with a similar profile: preserving capital when conditions are difficult and excelling when opportunities abound. A hedge fund that gains 15% in up markets but loses only 5% in down markets has asymmetry.
Risk: This is the volatility and drawdown profile of a strategy, but it is also about allocating risk wisely across the portfolio. In practice, I want to devote more of our risk budget to managers who excel in D, E or A. Finding one manager that maximizes all three virtues is rare, so we assemble a team of specialists and balance their strengths.
Recognizing excellence in these dimensions takes time and experience. Refining our understanding of excellence in each DEAR category is a never-ending process.
The DEAR Framework in Practice
Before diving into examples, understand how DEAR changes what you see as an allocator. Filtering decisions through Diversification, Efficiency, Asymmetry and Risk overrides bias and pushes a “both/and” mindset. The result is a flow of nonobvious investments that make sense once you train your eyes to spot them.
Examples of nonobvious opportunities we have seized, thanks to a DEAR mindset, include trend-following strategies, carbon credits, commodities, currency trades, reinsurance and fixed-income relative value. We viewed these not as quirky extras, but as structural diversifiers that earn their keep. This holistic approach to diversification notably helped us in 2022 when both stocks and bonds fell in tandem.
More recently, we conducted an analysis of three managers where the results were different from what we were expecting. One manager stood out for having a 2 Sharpe on 7% volatility. The other two managers had roughly half the Sharpe and twice the volatility. Therefore, I expected the 2 Sharpe manager to be the best fit.
However, it was just the opposite. While the 2 Sharpe manager was uncorrelated to equities, the 1-Sharpe-on-14%-volatility managers had -0.30 correlation to the All Country World Index, or ACWI. When you paired the negative correlations with the teen volatilities, these managers had a much bigger diversification impact on the rest of the portfolio.
When a portfolio is already top quartile among its peers, it is nonobvious to think that you can improve returns this much by uncovering just one unwarranted bias. In this case, it was my bias to prioritize Efficiency at an individual level at the expense of the powerful Diversification and Risk benefits that an investment strategy can bring at the portfolio level.
Not Just an Alternative, an Expansion of Tools
The DEAR framework gives the modern allocator a much richer set of tools than the Yale Model. It broadens the range of moves investors can make, allowing them to build both offense and defense in their portfolios with far greater precision.
DEAR addresses constraints of the endowment model, as it offers:
Liquidity as a dynamic lever. DEAR treats liquidity as something to actively manage and optimize, rather than as a fixed constraint. We deliberately hold more liquid strategies that we can dial up or down as conditions change. In a DEAR-oriented portfolio, liquidity is part of the risk equation. We can raise cash, increase hedges or buy into sell-offs because a significant portion of the portfolio can be rebalanced on short notice.
More ways to build asymmetry into a portfolio. A liquid portfolio without intentional asymmetric positioning cannot exploit sell-offs beyond simple rebalancing. DEAR exponentially increases the number of ways asymmetry can be built into an institutional portfolio. The ability to build asymmetry is not confined to equities and fixed income; it is confined only by an allocator’s ability to intentionally build more idiosyncratic asymmetry into the portfolio, thereby giving it more ways to win.
A broader investable universe. Under DEAR, any return stream that scores well on Diversification, Efficiency, Asymmetry and Risk is fair game. That means trend-following, commodities, niche credit, market-neutral arbitrage, specialized insurance-linked securities and beyond can all take a meaningful place in the portfolio. By casting a wider net, we ensure the portfolio is not overly reliant on one or two factors.
Scaling efficient strategies. DEAR creates a competition for capital where the largest positions are the strategies that provide the most ways to win. Positions are sized based on merit and portfolio impact, not an equity bias.
Collectively, these expanded tools enable an allocator to craft a portfolio with a degree of finesse that would be difficult for the traditional endowment model to match. We can be on offense when opportunities are abundant, on defense when risks are high, and make those adjustments in real time.
The DEAR Checklist
Using the DEAR framework led to some guidelines. Here is a DEAR checklist, which covers five steps:
1) Define the game before you pick the players. Choose an explicit benchmark to keep yourselves honest about performance and help prevent any unwarranted bias against certain strategies.
2) Set explicit DEAR hurdles for any investment. Before approving an investment, ask:
- Does it increase portfolio Diversification?
- Is it Efficient, in improving risk-adjusted returns?
- Does it enhance Asymmetry?
- Does it improve the portfolio’s overall Risk/reward profile?
- Is the liquidity profile appropriate?
3) Use mean-variance as the mirror, not the map. Run mean-variance optimization—i.e., expected return, risk and correlation inputs—not to doggedly follow its output but as a reality check, a mirror to see if you like what is staring back. The mean-variance analysis can highlight where you might be taking unrewarded risk or harboring an unwarranted bias.
4) Make liquidity part of Risk, not an afterthought. The recent cycle punished portfolios that overoptimized for long-dated illiquidity. Treat liquidity as a variable to optimize, not a binary box to check. When a liquid strategy can deliver DEAR-worthy returns at scale, its availability raises the bar for any illiquid strategy. Conversely, lock up capital for a truly rich premium, but knowingly and with sizing that reflects the higher risk of not being able to pivot. Liquidity is part of risk management.
5) Institutionalize the behavior. DEAR works only if it lives in the day-to-day process. Bake the DEAR principles into investment memos, manager evaluations, watchlists, rebalancing decisions, and even into how you discuss the portfolio with your investment committee.
Conclusion
The Yale Model remains an important foundation for institutional investors, but modern markets require greater flexibility and more dimensions of diversification. DEAR offers a durable, first-principles framework that can be applied across asset classes and market regimes.
The goal is not simply higher returns, but better returns per unit of risk with greater resilience and liquidity.
Institutional investors that systematically evaluate opportunities through diversification, efficiency, asymmetry and risk can build portfolios that are both more resilient and more adaptable to changing market environments.
—Reggie Sanders, CFA, CAIA, managing director, hedge funds and fixed income at the W.K. Kellogg Foundation
Sanders is managing director of hedge funds and fixed income for the W.K. Kellogg Foundation, reporting to the chief investment officer. In his role, Sanders supports the foundation’s efforts to promote thriving children, working families and equitable communities. He previously served on the foundation’s Impact Investment Committee for 16 years. Prior to the Kellogg Foundation, he was manager of pension investments for Eastman Kodak Company.
—With editing by Chief Investment Officer’s managing editor of custom content