<p>I believe Marketable alternatives is generally hedge funds which depending on the fund will invest in just about anything and can take on significant leverage. If you listen to Warren Buffett he does not like hedge funds because the managers are incentivized to take large risks.
Real Assets generally includes real estate but they have seperated it out-otherwise it includes things like Gold, Commodities, and Timber.
One thing to keep in mind is that this chart reflects MIT Policy not actuals. If you look at MIT actuals for 2009 it is much more heavily tilted to private equity, or atleast it appears to be the case since MIT has included private equity in with public equity in their financial report.</p>
<p>One more comment on hedge funds and private equity. Private equity is a much higher percentage of the endowment now because a limited partner typically has no right to pull money out from the fund, and because of the capital call committments the schools have made to private equity. So private equity is the least liquid. Hedge funds normally allow withdrawals but you can only do them quarterly and again depending on the fund you have to do it over some time. So hedge funds is where the schools went to deal with their liquidity problems so their allocation is lower now than it has been. What’s interesting is how many hedge funds are not allowing withdrawals which is troublesome.</p>
<p>The reason Buffett does not like hedge funds is that the 2 and 20 payoff for hedge fund managers(payoff is similar for private equity) encourages risk. They typically get 2% of invested funds and 20% of profits above a risk free benchmark. That encourages risk and leverage because the big money is in the 20% of profits.</p>
<p>[IRS</a> To Audit Harvard as Part of Non-Profit Probe | The Harvard Crimson](<a href=“http://www.thecrimson.com/article/2010/1/13/harvard-irs-hmc-compensation/]IRS”>IRS To Audit Harvard as Part of Non-Profit Probe | News | The Harvard Crimson)</p>
<p>dstark, I wonder if they are closing the door after the horse has left the barn. </p>
<p>There is a real question about how you fund high quality academic institutions. The US model seems a lot better than most others – Cambridge and Oxford have found themselves too reliant on the vagaries of the British government and its various social objectives and are looking to start actively raising funds from alumni and businesses (who are not used to giving) and they generally beat the institutions of higher education in other countries. But, once the Harvards of the world start competing with each other based upon academic output and student quality, there isn’t an obvious end to their financial needs (especially given the quality of the financial management).</p>
<p>Their biggest problem with respect to their current financial debacle was probably being forced to get rid of Jack Meyer because they were paying him too much and looked too much like a profit-making entity.</p>
<p>but still, it does say that that the Harvard Investment bankers " oversaw the endowment’s growth from $4.7 billion to $26 billion" didn’t it? The benefits of their aggressive investment far outweighs the risks.</p>
<p>
</p>
<p>The flaw of that argument is that it also leads to significantly higher returns.</p>
<p>shawbridge, I do not know how it is going to play out for Harvard and other top private institutions. </p>
<p>I have no idea.</p>
<p>Jason, I would agree that it can lead to higher returns when things are going well in the economy, but risk and leverage can and usually does cause calamity when things turn bad. With colleges having 80% and more of their endowments in tier 3 assets we really don’t know how well they have done.</p>
<p>
</p>
<p>Not when they took a $36 billion endowment and six months later had to borrow money to pay the light bill. Nobody is singling out Harvard and Yale for their losses. We are singling them out because they completely mismanaged the liquidity in thier endowments.</p>
<p>One more comment on risk/reward and this pretty much comes from Economics 101 which I got a C+ in. There are 3 kinds of risk reward-low risk/low return,medium risk/medium return, and high risk/high reward. Financial utopia is low risk/high reward - everyone tries to sell it but it doesn’t exist. It’s clear the major endowments went from the traditional medium risk approach to a high risk approach over the last 10 years.</p>
<p>Thats fine but if you go that way you have to make adjustments as an institution to deal with the fact that in a high risk/high reward profile there are going to be times when you fall off a cliff and take a 50% hit. The high endowment Schools have been spending like this was never-ending which it never is. </p>
<p>Also, you have to recognize that investment companies that operate in the high risk/high reward area are tough and merciless. These are not your button-down ivy league gentlemens club sort of folks. They spend more time in Las Vegas than their local library. I think i’m a pretty good investor but these guys would eat my lunch. I heard a Yale economics professor say recently that he knew there were going to be problems when he saw the pay checks his B and C students were getting at these firms. </p>
<p>From what i’ve seen the colleges that stuck to the medium risk approach are doing fine and I think the big endowment schools are re-thinking this high risk approach–unfortunately they are knee deep in it now and don’t know how to get out.</p>
<p>interestaddad, agree that the misjudgment about liquidity was really significant, but in Harvard’s case, there was also something else. If I remember the newspaper accounts correctly, HMC had hedged (liquid) against a downturn. Summers took off the hedge and no one, possibly including El-Arian, felt they could put it back on. My sense was that when HMC was intact under Meyer, they would have had a much greater ownership of the hedge than when the PE and HF activity had been outsourced.</p>
<p>Princeton published their annual report:</p>
<ul>
<li><p>87% of their endowment assets are tier 3 and 81% of all invested assets are tier 3(believe thats the highest ratio I have seen).</p></li>
<li><p>In their $12B endowment they have 4.0b in private equity, 2.8B in real assets, and 2.7B in hedge funds.</p></li>
<li><p>They have $5.5B remaining in capital call committments</p></li>
<li><p>Their expenses in 2008-09 were up about 10% or about $100M. $50M came from academic services and $30M from interest.</p></li>
<li><p>I thought it was interesting that they did say that “the University intends to issue additional bonds in the future”. Don’t normally see that.</p></li>
</ul>
<p>About all the big endowment schools have published now except Yale unless I can’t find it which is possible.</p>
<p>Wow. Cash call commitments equal to 46% of the endowment. That’s the highest number I’ve seen, surpassing Amherst’s 39%.</p>
<p>[2nd</a> UPDATE: Man Group Shares Sink As Recovery Falters - WSJ.com](<a href=“http://online.wsj.com/article/BT-CO-20100115-703775.html?mod=WSJ_World_MIDDLEHeadlinesEurope]2nd”>http://online.wsj.com/article/BT-CO-20100115-703775.html?mod=WSJ_World_MIDDLEHeadlinesEurope)</p>
<p>Man Group is one the largest hedge fund companies out there. while there have been reports of recovery in hedge funds this article shows there are still risks and uncertainties out there in the hedge fund world.</p>
<p><a href=“http://www.reuters.com/article/idUSLNE60E01P20100115[/url]”>http://www.reuters.com/article/idUSLNE60E01P20100115</a></p>
<p>this article is better</p>
<p>
</p>
<p>The problem is that the risks of these instruments were not fully understood or considered. The risk that was not considered was that a wrong investment could bring down the whole organization–think Lehmann Bros. death. No organization that hopes to continue to exist would knowingly make that investment.</p>
<p>Sure, aggressive investing often leads to outsized gains. I could invest in XYZ investment with the idea of perhaps losing the whole of my investment, but perhaps getting a real big pay off. But if the downside of the investment was that if the investment went south, they would take me out and shoot me–well, that’s not an investment I’d make, no matter how big the pay off or how small the chance that I’d be shot.</p>
<p>[Hedge</a> Fund Investors Take Their Revenge - BusinessWeek](<a href=“Businessweek - Bloomberg”>http://www.businessweek.com/magazine/content/10_04/b4164059526486.htm?chan=magazine+channel_what’s+next)</p>
<p>This article does a good job of summarizing what has been going on with hedge funds the last 2 years and discusses the issue of hedge funds blocking redemptions</p>
<p>Ellem I think the classic example of what you are talking about is Long Term Capital Management. LTCM was a hedge fund whose main players were John Merton (professor at MIT and Harvard) and Byron Scholes (professor at MIT, Chicago, and Stanford), and both Nobel Prize winners in Economics. They figured they had solved the low risk/high return problem with a massively complex program. Between 1994 and 1998 their fund went up 40% a year. So you have the brightest folks in the world, a mathematically fail proof system, Nobel prize and 40% annual returns. Not unexpectedly in short time they had $100Billion invested with them. Virtually overnight something happened that wasn’t supposed to happen based on their formulas and with 1trillion in leverage the fund was wiped out—well that was until the government stepped in and rescued some big players.</p>
<p>So what is Scholes doing now-running a hedge fund.</p>
<p>I think LTCM is a perfect example, sm74…done in by the Asian contagion of 1997 and other currency crises in 1998.</p>
<p>The problem with all of these new-fangled instruments is that no one is really sure how these instruments will act under unfriendly circumstances nor how far the downside risk goes.</p>
<p>
That’s like I knew the dot-com bubble was about to burst when I went to my reunion and classmates who could not tell a server from a sewing machine were running technology companies.</p>
<p>An old Wall Street truism goes: *There is something for bulls. There is something for bears. Pigs get s**t. *</p>
<p>Dartmouth president holds a budget forum:</p>
<p>[TheDartmouth.com</a> | Kim announces Thayer renovation plan during budget forum](<a href=“http://thedartmouth.com/2010/01/15/news/forum/]TheDartmouth.com”>http://thedartmouth.com/2010/01/15/news/forum/)</p>