An Endowment Fund is created by transfer of money to a trust by individuals or institutions, with the aim of investing the money and keeping the principal intact forever or for a definite period of time.
US Endowment Funds are non taxable funds since the funding comes from legacies, gifts and ROI and are for non-profitable organizations. They are primarily found in Universities but other non-profit organizations have taken up the idea as well. Famous endowment funds include Harvard University with a fund of US$35.9 Billion and Yale with US$22 Billion in June 2008.
Endowment funds are used by Major Universities and Schools around the world, especially in the US, in order to fund expenditure for the pursuits of the institution. The idea was made famous by David Swensen, in 1985 as the Chief Investment Officer of Yale University. He proposed the "Yale Model" which involved breaking up a large amount of capital into many asset classes and investing in them. Typical asset classes involve equities, fixed income, hedge funds, private equity, and Real assets such as commodities, currencies and real estate.
The rationale behind this approach as explained by Mr Swensen was that by investing heavily in relatively illiquid assets, as compared to publicly traded shares and bonds preferred by shorter-term investors, an institution with an unlimited time horizon would earn a substantial premium. This meant that permanent endowments could ride out market downturns and credit crunches. But such an approach only works with a sizeable amount of capital and with adequate amount of diversification.
These universities have achieved over 15% returns annualized over 10 years for funds with assets of more than US$10 Billion and 11.4% for smaller funds.