How Much Did Harvard Lose?

by Andrew Gillen

Lost among the holiday shuffle was a piece in the Huffington Post (HT: Felix Salmon) which claims that Harvard’s losses on it’s endowment are much larger than the reported $8 billion:

Harvard University's admission that it lost $8 billion from its $36 billion endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the loss… According to a source close the Harvard Management Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18 billion if the losses on the fund's illiquid investment are realistically appraised…

…shifting the lion's share of Harvard's money from American stocks, bonds and cash to highly esoteric investment which were not only illiquid but whose imputed value often could not be easily determined by outside parties. So, by the time the bubble burst in the fall of 2008, less than a fifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds.

Nearly 28% of Harvard Endowment fund was in what the fund manager's called "real assets," a category comprised of timber forest and arable land in remote areas, commercial real estate participators, and huge stockpiles of oil and other physical commodities. Such "real assets" plunged in value, if they could be sold, much more severely than the stock market averages.

Paul Kedrosky notes that this is mostly “a mark-to-market issue. Does Harvard have to mark its illiquid investments to market, or does it not?” He leans toward “marking as much of it to market as I could.”

If I were involved, I’d certainly want to know the mark to market values, but I wouldn’t place too much emphasis on them given that, as Megan McArdle points out,

the Harvard Endowment (unlike almost any other fund) can guarantee that it won't need to sell any of its illiquid assets any time soon

She also offers some thought on the news which seems to

indicate that Harvard was getting its high returns just like all the other financial firms were: by investing in risky, illiquid assets (including shares in hedge funds who did same). Their ability to massively diversify--again, much more than most funds who have shorter time horizons and narrower mandates--made that almost always a winning strategy.

Jake at Econompic offers some analysis as well, and shows that:

Harvard's endowment has become increasingly reliant on capital gains vs. income over the past 20 years, with income returns accounting for less than 2% of total returns in 7 of the past 8 years. In an environment characterized by asset deflation and equity market collapse (i.e. the past 6 months), capital gains get crushed.

Perhaps the take away point is that if Harvard was forced to sell, they would see very large losses, but that's not very informative or useful given that they won't be forced to sell.