Monday, August 13, 2007

Harvard's Little Investment Loss ($350 million)

By Richard Vedder

I have been increasingly uneasy about the new wave of thinking amongst endowment managers of universities, who have increasingly been aggressively pursuing high risk but high return investments in hedge funds, leveraged real estate deals, etc. There is a tradeoff between risk and return, and I have always thought universities should be pretty conservative, sacrificing some capital gains for reduced volatility in the size of the investment portfolio. To be sure, bigness allows wealthy universities some options --they can make 10 risky investments among 100 less risky ones, and even if a few of the risky ones fizzle, but one or two come in big, they are ahead.

By way of background, we recently learned that Harvard just took a $350 million loss on a hedge fund investment. That is only 1.2 percent of the endowment, and it may mean that the rate of return on investments this year will be, say, 12 percent instead of 13.2 percent. But it is an early warning signal, and a suggestion that universities that invest more than, say, five percent of their money in highly speculative investments may have some big time explaining to do soon for their aggressive investment behavior.

My university, Ohio University, and Harvard have roughly the same number of students (mine has slightly more). Yet the investment loss of Harvard far exceeded the total size of Ohio University's endowment. After all, it amount to almost $20,000 per student, which means $1,000 in income if the University spends 5 percent of endowment funds. At many schools, that amount of money would make the difference between extremely austere budgets and relatively plentiful ones. At Harvard, it is a minor setback of near inconsequential importance. We have no idea what Harvard spends out of its endowment, for example, on the running of programs. It is time to end that and to demand transparency. Many wealthy Harvard alums lower their income taxes by making donations to Harvard, so the Feds are entitled to know --where is the money going?

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