Endowment

Endowments are usually designed to last indefinitely. The original gift is invested, and only part of the investment returns is spent each year, so that the fund can keep supporting the institution for future generations.

Many endowments follow a spending rule, such as spending around 4% to 5% of the fund’s average value over several years. This balances current needs against protecting the fund’s long-term value from inflation.

Donors may place restrictions on how the money is used, such as funding scholarships, research or a particular department.

For example, a donor might give 1,000,000 to a university to fund scholarships. If the university spends 4% a year, the endowment provides about 40,000 annually while the rest stays invested.

Large university endowments, such as those of Harvard, Yale and Stanford in the United States, are worth tens of billions of dollars and are known for investing heavily in alternative assets, such as private equity, hedge funds and real assets, an approach often called the endowment model. Endowment taxation and spending have been subjects of political debate.