There is a gem in Piketty's book for you on page 447. Piketty discusses returns on university endowments. Harvard, Princeton and Yale earned an average of 10% real return 1980-2010 while smaller colleges got 6-8%. Piketty shows that normal colleges invest in normal assets like bonds and stocks, while the abnormal returns for the elite colleges come from "alternative investment strategies" such as private equity, unlisted stocks, real estate etc with inside deals.
Economics professor Pikettys naively concludes: “How can these facts be explained? By economies of scale in portfolio management.”
This interpretation is fairly important to Piketty's model, which assumes the rich earn higher rates of return due to economies of scale in portfolio management. His evidence is college endowments. For investments funds, there is no evidence size relates to returns.
If you put just $10,000 into Vanguard's index mutual fund, they'll give you a microscopic expense ratio. Warren Buffett puts some of his heirs' trust funds into Vanguard because he wants in on Vanguard's economies of scale in portfolio management. But, Vanguard won't beat the market.
Maybe some guys can beat the market regularly, but is their secret sauce really "economies of scale?"
I'm sure [Yale's endowment manager is] really good at his job, but I'm wondering, though, if there might not be another factor at work in the most exclusive colleges getting the highest returns on their investments.
Maybe they've just been piling on the excessive risk and one of these years it will all come crashing down. Maybe.
Or, maybe, the top universities' fund managers are getting a little help, maybe they are being passed a tip or two about future financial news by the parents of no doubt worthy but not quite exceptional children in return for a little pull at the admissions office?