Endowment Blues

by Andrew Gillen

Beth Healy reports on some details of Harvard’s endowment problems.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash…

But the warnings fell on deaf ears, under Summers’s regime and beyond...

Felix Salmon notes the most interesting part

Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%...

Summers was playing a high-risk carry-trade game with Harvard’s cash…

No one had the stones to stand up to Summers when it came to this high-risk strategy of essentially borrowing at Treasury rates and investing the proceeds in an illiquid long-term endowment…

Investing the cash in the endowment lead to an extra 1.8 billion loss last year. To be fair, Brad DeLong notes that even with the 1.8 billion loss, Harvard still likely came out ahead

So what margin did Harvard get on its invested cash? IIRC, endowment returns averaged 11% per year from 2001-2007, with short-term interest rates over that time span averaging 3%. So it would seem that 6 x (11% - 3%) -27% = 48% -27% = +21% puts Harvard ahead on the deal, no?

But Felix correctly responds that even if they came out ahead ex post, ex ante, it was the wrong decision:

the difference between a long-term endowment, on the one hand, and a “cash account… the money you’re spending should be liquid, not tied up in an endowment which can drop 27% in one year.