<p>sm74, I agree with you.</p>
<p>This tells me the guys who run the schools are overpaid.
The investment managers are overpaid.</p>
<p>If you cut the cost of the investment managers and those that run the company, the cost of running a school drops. The cost per student drops. Many of the costs are paying people too much.</p>
<p>Hoedown, interesting link. Very risk speculation in endowments. Amazing losses. Illiquid. Endowment per student…what a joke. High paid money managers. High paid money managers that were gambling with that money. Well, investing is gambling, but these managers…</p>
<p>"The lack of clarity says a lot about how exotic Harvard’s finances have become. Its team of highly incentivized money managers—who themselves earned $26.8 million in 2008—adopted a strategy aimed at taking maximum advantage of an inflationary global boom in the early 2000s by shifting the lion’s share of Harvard’s money from conventional endowment assets—such as bonds, preferred stocks, Treasury bills, and cash—into more esoteric investments that would presumably rise as more money chased after scarcer goods. They bought, for example, oil in storage tanks, timber forests, and farmlands. As the proliferation of trillions of dollars worth of subprime mortgages further expanded the bubble, driving up the price of oil, lumber, and land, the notional value of Harvard’s portfolio soared.</p>
<p>The price of oil, for example, which Harvard and other speculators were storing, more than quadrupled to $153 a barrel on commodity exchanges, allowing Harvard to hugely appreciate the notional value of its portfolio. So between fiscal 2003 and 2008, Harvard’s “real assets” showed a gain of nearly 25 percent annually. But even after the subprime mortgage crisis began to unfold and a number of financial institutions had collapsed, Harvard’s money managers persisted in pursuing this risky course.</p>
<p>Consequently, as late as June 2008, the fund kept almost no reserve of cash or Treasury bills and allocated a mere 6 percent of its money to fixed-interest bonds. It also borrowed more than $1 billion to amplify the returns on its less conventional investments. So by the time the bubble burst in the fall of 2008, only a small fraction of the endowment fund investment was even under the jurisdiction of the SEC. According to the November 7th 13F holding report it filed with the SEC for the quarter ending September 30th, 2008, Harvard had only $2.88 billion of its funds in exchange-listed stocks, options, or other derivatives. What of the more than $35 billion it had allocated to investments at the start of fiscal 2009 (i.e., July 2008)? Most of the balance had been allocated to investments, which if not totally illiquid could not be valued by market activity. The breakdown that follows illuminates how far HMC had strayed from the path of traditional endowment investing in the last decade.</p>
<p>More than one-quarter of Harvard’s funds were still sunk in “real assets”: about 8 percent in stockpiled oil, about 9 percent in timber and other agricultural land, and 9 percent in real estate participation. Then came the financial crises, and prices plunged. Oil fell to less than $40 a barrel. Lumber suffered almost as badly. And, with the drying up of bank lending, the value of Harvard’s real estate holdings—which remain opaque—became at best problematic. One indication of how steep the loss may be is that CalPERS, the giant pension fund of the California Public Employees’ Retirement System, which owned even more real estate acreage than Harvard, reported in this period a 103 percent loss on real estate deals in which, like Harvard, it had borrowed to amplify its profits.</p>
<p>Another huge portion of Harvard’s endowment had been farmed out to hedge funds (18 percent) and private equity funds (13 percent). While these funds provided some diversification, many of them also impose restrictions on withdrawals, including ones, like Citadel, that suffered substantial losses. To get back its money under such circumstance, it was often necessary to sell at a steep discount to a “secondary” hedge fund. One major player in the private equity business tells me that Harvard had tried this fall to sell its private equity stakes at 30 percent to 35 percent discounts but could find no buyers even at those prices. It’s also possible that Harvard will have to meet “capital calls” on its private equity investments that would sap even more capital.</p>
<p>Harvard also allocated nearly $4 billion, or 11 percent of its fund, to volatile emerging markets, such as Brazil, Mexico, and Russia. Here its money managers bet both that the stocks would go up and that the local currencies would at least hold steady against the dollar, but they lost on both counts. First, the thin local stock markets, which had little liquidity, collapsed in the financial crises. For example, Russian stocks lost almost 80 percent of their value in a matter of days last fall. Then, as banks and hedge funds got out of their currency trades, the local currencies in many of these countries also lost heavily against the dollar. The Brazilian real, for example, fell about 40 percent last year. So presumably the endowment fund took a double hit. Aside from emerging markets, Harvard had invested another 11 percent if its portfolio in more established foreign economies, as those of Britain, Germany, France, Italy, Australia, and Japan. But here the stock markets declined and, with the exception of the Japanese yen, so did their currencies.</p>
<p>Given the true cost of getting its money out of the hedge funds and other illiquid investments, my knowledgeable source finds the claim by Harvard’s money managers that the fund lost only 22 percent at best “purely Pollyannaish.” (A Harvard University press representative declined to comment for this story.) But while Harvard’s money managers may chose to look through rose-colored glasses at the value of their portfolio, Harvard University, which relies on the interest from distribution from its endowment to fund one-third of its operating budget, needs to be more realistic."</p>