These endowments are tax-exempt entities. They invest small portions of their money in hedge funds which are traditionally structured as partnerships for US tax purposes. In a partnership, the partners pay taxes directly on the income at the partnership level. That's as opposed to, say, AAPL which is taxed as a corporation. Corporations pay their own taxes, and the shareholders pay taxes on distributions from the corporation. Because of an obscure tax law preventing tax-exempts from engaging in "unrelated businesses", investing in a vehicle that doesn't pay its own taxes (such as a partnership) risks these endowments actually incurring a tax they otherwise shouldn't. Instead, the hedge funds pick an offshore income tax-free jurisdiction (most commonly Cayman) and invest in the hedge fund through a "feeder fund" that is taxed as a corporation and "blocks" the unrelated business income tax. To make it clear: if a US person were to make the same investment, it would generally have a better tax result by investing directly in the partnership than the tax-exempt entities would. This is just a legal mechanism to resolve that unintended consequence.
Exhausting! So what am I missing here?