
Universities Are Becoming Billion-Dollar Hedge Funds with Schools Attached - ShaneBonich
http://www.thenation.com/article/universities-are-becoming-billion-dollar-hedge-funds-with-schools-attached/
======
andr3w321
I don't really care if universities hire hedge managers to manage their
endowment, but it's absurd that schools with multibillion dollar endowments
still charge tuition. Yale has ~12,000 students and a $26 billion endowment.
Tuition is ~$45,000 per student. $45,000 * 12,000 = $540 million. They can't
spend 2%(540/26,000) of their endowment per year on free tuition? What is this
money for?

Of course this ignores financial aid so Yale's operating costs are much less
than $500 mil/year. If you're going to donate to a university your money will
go much further at a small college that actually needs your money and will
actually spend it rather than hoarding it. TMQ had some great articles about
this topic back in the day.
[http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert...](http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert-
griffin-iii-blaine-gabbert-why-mega-trades-work-nfl-tuesday-morning-
quarterback) Halfway down.

~~~
inthewoods
Even worse, in my opinion, is that these institutions can continue to be
considered Not for Profit organizations.

Harvard is very interesting in this way - they have so much money in their
endowment that they seek all kinds of investment. Real estate is one of their
favorites. When they buy property, it can no longer be taxed. This is why the
towns surround Cambridge hate when Harvard buys up property. Watertown, in
particular, has really been furious at this trend. In Worcester, the colleges
use up city resources and yet pay nothing in taxes in terms of city services.

~~~
chrisabrams
Am I reading this correctly? A non-profit can buy real estate property and not
pay taxes on the property? Is this investment property, or property being used
for university usage?

~~~
hkmurakami
That's why churches can remain where they are, often in very desirable
locations.

~~~
Ntrails
It is also why charity shops annoy people so much, they can afford to run
rather easier whilst skipping out on chunks of business rates etc

~~~
chrisbennet
Who's annoyed?

~~~
mathattack
Mostly their competitors, and perhaps people who would prefer more upscale
shopping.

~~~
limeyx
Or maybe people who like roads, firefighters, police ....?

------
huac
A bit tangential, but don't donate to Ivy Leagues. I get that you might feel a
sense of pride in having graduated from the school, but with a 11 digit
endowment, you can rest assured that the school will be there for future
students in perpetuity.

Rather, give to state schools or community colleges or really, any other
school. Help them serve students of all economic backgrounds, not just the
elite. The most important consideration for spending money is generally its
marginal benefit (obviously equal amounts are worth more to poorer
institutions) but we could also think about this in terms of _marginal
students_ \- how many more students can attend/graduate with less debt because
of our donation?

~~~
nostromo
I agree with you, but many people see that as a plus when donating.

If I give $x to an organization that desperately needs it, it will be spent
immediately. If I give $x to an endowment, it will sit there in perpetuity,
providing investment income to the organization for decades or centuries.

Ben Franklin understood this and left a small amount of money (1,000 pounds)
to the cities of Boston and Philadelphia in his will, instructing that the
funds not be used for 200 years.

[http://eddiethompson.org/2012/09/30/franklin_endowment/](http://eddiethompson.org/2012/09/30/franklin_endowment/)

~~~
Cacti
Not to be flippant, but, it's a good thing Ben Franklin wasn't born in
Zimbabwe!

~~~
Houshalter
Back then money was based on precious metals, not monopoly money. Although
Early America did have problems with hyperinflation from war debts. Anyway the
point is the money is invested, so it's not literally just cash sitting in a
vault, but is earning itself interest.

~~~
justincormack
The point is that interest does not always cover inflation. The fact that
money was gold or paper back then makes no difference. Invested money can be
lost.

~~~
Houshalter
With a currency backed on gold there is no such thing as inflation. And in
fact money tends to increase value over time, as the economy grows.

Of course invested money can be lost, but on average it grows. The expected
value of investing is almost always positive.

------
inthewoods
I've been waiting for this article to surface on HN. The other problem here is
that hedge funds, as an investment vehicle, really haven't done that well. So
it is essentially a transfer of donations to the hedge fund industry while the
endowment could have done better avoiding them altogether. Obviously there are
some hedge funds that have done well - but on the whole they are expensive and
do not add alpha.

Back in the day, Harvard didn't outsource to hedge funds but instead had the
portfolio managers in-house. These folks were paid a small fraction of what
they would make in the private hedge fund industry, but my understanding is
that the Harvard community was up in arms at what they were making - so they
quit/got pushed out and then Harvard started outsourcing to hedge funds. The
result was worse performance and higher fees.

Of course, it's not all roses - Larry Summers famously made a terrible bet on
interest rates that Harvard had to unwind at a large loss.

~~~
digikata
Is the outsourcing somewhat recent? I've been reading through the actual text
in the Piketty book and he discusses the relative advantages of large
university endowments vs smaller ones. He has a data table in it for 1980-2010
where the returns seem pretty reasonable (but much higher for larger account
balances of Harvard-Yale-Princeton).
[http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf](http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf)

People can argue about his book's overall points, but few can argue that he's
accumulated a lot of interesting data.

I've been trying to reconcile that data with the Buffet view of complex hedge
funds not beating straight index funds for gain... and by some other data
Buffet is correct.. but the risk profiles may differ (Though it often feels
like "risk" is the financial industry equivalent of engineering fudge
factors).

~~~
inthewoods
That's a great question - when I was in the industry (back in 2005-2006)
Harvard had already outsourced a large portion after their managers left. In
many cases, the managers started up their own funds and then Harvard
immediately placed money into them.

I think the answer may be that Harvard (and others) continue to see decent
returns - the question is at what cost relative to managing it internally.

------
KKKKkkkk1
The problem is that an Ivy League school is paying the expenses of managing
investments worth a gazillion dollars instead of focusing on research and
education. Money management is not what the universities are good at, and it's
not what they are for. But in fact, the "hedge fund problem" is not the only
problem American universities have - they are also running sports teams,
housing, construction and real estate operations and whatnot. It's as if the
purpose for which they were created has become an afterthought.

~~~
ykl
Not to mention vast hospital networks~ in a number of cities, universities run
major or even the primary hospital network in the city.

~~~
jsjohnst
How do you suppose that med students get the required on the job training (aka
residency) otherwise? Teaching hospitals are a very necessary thing in the
medical field.

~~~
ykl
I didn't say universities shouldn't have hospitals. I was just pointing out
that it's another field that universities are highly involved/invested in.

------
rayiner
> Yale’s comparatively modest $26 billion endowment, for example, made hedge
> fund managers $480 million in 2014, while only $170 million was spent on
> things like tuition assistance and fellowships for students.

For context, Yale's endowment produced an investment gain of _$4 billion_ that
year. Seems like the $480 million was money well spent.

~~~
SilasX
Is that investment gain _net of_ the fund manager payment? Because an S&P 500
index fund would have returned 13.5% that year[1], or ~$3.5 billion, about the
same as $4 billion minus the half-billion hedge fund managers costs. And
presumably they had to pay other investment managers (for non-hedge
investments), and the money in HFs is significantly less liquid and accessible
and more volatile.

[1] [http://performance.morningstar.com/fund/performance-
return.a...](http://performance.morningstar.com/fund/performance-
return.action?t=VFINX)

~~~
beeboop
This is ignoring a lot that goes into investment management. It's easy to say
S&P would have done just as well on that particular year, but what about every
other year? What about years with big losses? Additionally, investment
managers do things like create portfolios for you that match your risk
tolerance or other special needs/requirements.

Overall, it's true that managed investments don't do as well as index funds,
but it's ignoring a lot of the risk management that goes into being actively
managed.

~~~
SilasX
Being able to find where you are on the risk/return and growth/income
spectrums is not hard enough to merit the hundreds of millions of dollars in
fees.

For whatever strategy you want, find the corresponding index fund with that
strategy, and it will probably have done better after expenses and will have
more liquidity and less volatility.

~~~
machinshin_
When you have 40 BILLION to invest, you can't just dump it into an index fund.

~~~
saryant
_One_ Vanguard fund has $186 billion under management. The whole company
manages $3 trillion.

I think they'd be okay.

~~~
tanderson92
I really shouldn't nitpick (so please do forgive me), but strictly speaking
the whole company doesn't manage $3T. It is true that's the best number to
compare to the rest of the industry, but Vanguard has a rather unique
corporate structure. The end result is that each Vanguard fund is a company
which owns part of the umbrella group. This inverted corporate structure is
set up so that the fund-owners have direct stake in management 1) of the
umbrella organization 2) only of each individual fund, not other "leaves" of
the tree.

It might seem like a distinction without a difference, but it's the single
greatest reason their cost structure is so much more attractive.

------
Animats
Stanford spun off its investment operation in 1991 as the "Stanford Management
Company".[1] Their management has become more aggressive over the years;
they've gone from 10% private equity to 25% private equity. Stanford is
involved with VC pools that invest in startups. They own substantial parts of
Google and Cisco.

The Stanford Management Company also operates Stanford's substantial real
estate holdings. Stanford owns about 12 square miles of Silicon Valley.

[1] [http://www.smc.stanford.edu/](http://www.smc.stanford.edu/)

------
teaman2000
The issue is not so much that schools invest in hedge funds (the endowment
managers are just trying to maximize returns), but that the endowments pay out
such a small percentage of their funds each year to support research,
financial aid, and everything else. Harvard pays out only 4-6% of the
endowment yearly. On their huge endowment, if they increased the payout by
.5%, they would have a whole lot more to spend on worthy activities instead of
saving for the year 3000.

~~~
bpodgursky
This is incredibly shortsighted. The point of an endowment is not to pay it
off, the point is that the endowment persists indefinitely, and the interest /
returns fund operations.

If people wanted to contribute directly to a university, they can. Instead
they're contributing to the endowment. Respect that choice.

It's pathetic that universities have actually set up a sustainable source for
funding scholarships etc indefinitely -- where spending caps are actually
restricted -- and the vultures immediately descend to suck it dry and spend it
off. And then in a few decades when it's gone: ???

~~~
toomuchtodo
What if university endowments were used to fund research and implementation
into ways to drive down the cost of education to zero?

~~~
leakybit
The internet has already driven the cost of education to zero, what schools
are really selling are degrees. Anyways, Yale only spends $170 million on
tuition assistance, but in reality ; Yale covers full tuition and housing
costs for students who's family income is less than $200,000.

~~~
wallacoloo
> The internet has already driven the cost of education to zero [...]

For things like CS, sure - mostly. Excepting for slightly niche areas like
embedded programming, you can achieve similar experience for $0.

But for most other [engineering] degrees, this isn't true. You can't tape out
a custom integrated circuit (IC) for free, but this is something some EE
undergrads get to do at brand-name universities. Even the licensing cost of
the software used to design those ICs can reach six figures.

I imagine there are similar things with chemistry, material science students
and especially medical students.

But yeah, even in those other engineering fields, the internet has _reduced_
the cost of education.

------
Pyxl101
The article title "...with Schools Attached" misses an important fact about
most universities. The purpose of most universities is to engage in scientific
research. They are not schools, not primarily. They are chiefly _research
institutions_ that, yes, have schools attached.

For more about this, read:
[http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/...](http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/the-
purpose-of-harvard-is-not-to-educate-people/)

> [T]here is one misimpression that people seem to have, that might as well be
> corrected before any hasty actions are taken: the purpose of Harvard is not
> to educate students. If anything, its primary purpose is to produce research
> and scholarly work. Nobody should be surprised that the gigantic endowment
> isn’t put to use in providing top-flight educational experiences for a much
> larger pool of students; it could be, for sure, but that’s not the goal. The
> endowment is there to help build new facilities, launch new research
> initiatives, and attract the best faculty. [...]

> Don’t believe me? Here is the test: when was the last time Harvard made a
> senior tenure offer to someone because they were a world-class educator,
> rather than a world-class researcher? Not only is the answer “never,” the
> question itself is somewhat laughable.

> This is not a value judgment, nor is it a particular complaint about
> Harvard. It’s true of any top-ranked private research university, including
> Caltech. (Note that Caltech has over 1200 faculty members and fewer than 900
> undergraduate students.) And it is not a statement about universities in
> general; many large public universities, and smaller liberal-arts schools,
> take education very seriously as a primary mission. This is by no means
> incompatible with being a top-notch research institution — the physics
> departments at places like Berkeley or UC Santa Barbara would be the envy of
> almost any private research university. But those places also take their
> educational mission very seriously, which Harvard, honestly, does not.

~~~
timrpeterson
Except, they treat their researchers like total crap. Taking 2/3 of all grant
money for overhead? Salaries for 45 year olds with 20 years of experience that
are the same or worse as 25 year old with zero experience in private sector.
Publish or perish? This whole thing you say these schools focus on, research?
Pathetic. And trust me I know I've been at all the top schools and am now a
professor.

~~~
adminprof
It's strange to me that you're a professor but the things you're saying aren't
true. The 2/3 grant money thing I think you are talking about indirect costs?
That's not money off the top of received grants, it's computed like a tip,
where when you receive $1 of grant funding, the university receives $0.66. And
only on non-equipment, non-tuition (for funding students) items. So it usually
works out to being about 35%.

And Ivy League universities pay their faculty quite well, especially in
computer science. I don't know of any cases where a entry-level software
engineer is paid even close to what a full computer science professor makes on
even their 9-month salary.

This makes me ask, have you really "been at all the top schools and am now a
professor"? I feel like any assistant professor would know these things.

~~~
tanderson92
Let's make sure to compare apples to apples, even when discounting the 9-month
salary (no CS professor truly gets the summer off, that isn't how the academy
functions):

* Entry-level software engineers have 0 months experience.

* Full professors in CS have 5 yrs of a Ph.D., and perhaps 2-4 years of postdoctoral experience, and 5-7 years of professorial work.

~~~
adminprof
Totally agree the comparison isn't equal. But what I'm saying is that the
9-month salary is already way higher than an industry salary. If they worked
the 3 summer months funded by a grant, it's like getting a 33% bonus on top of
their 9-month salary.

~~~
tanderson92
Yes I grant you the point about a 9-month salary, that's what I meant by
discounting: to take into account.

The main point remains, you cannot compare someone with 10-15 years post-
college experience with a new hire. It's absurd.

------
Houshalter
I don't see the issue with this. These are long term institutions. Many are
centuries old. They should invest their money for the long term and survive
off the interest.

What's more remarkable is that people voluntarily donate money to them. Why
would you do that? These institutions are not in need of cash by any means.
And if you are going to be charitable, there are organizations where that
money can do far more good, like the top Givewell charities.

------
lr4444lr
Sidenote, and I may get down-voted heavily for saying this, because he's got
plenty of "cred" on so many different fronts, but Noam Chomsky always struck
me as a hypocrite when it came to his economic and political thinking for
taking a pension supported by the $13 billion MIT endowment, which is surely
generating money through many of the practices disparaged both in this article
and Chomsky's own beliefs.

~~~
hiddencost
Hypocrisy is such a boring & irrelevant criticism in most contexts. His
critical theory is much more important than his practice. He has to survive in
the world that exists, not the one he wishes existed. There's really minimal
value in such a symbolic gesture as rejecting a pension, and criticizing his
ideas on such irrelevant grounds takes away from actually talking about the
issues raised.

~~~
spriggan3
> His critical theory is much more important than his practice.

People should also do what they preach. And acknowledge their own bias and
hypocrisy which Chomsky never does. He does like you, dismisses any criticism
as "irrelevant" and that's why nobody can debate with Chomsky, there is no
discussion.

~~~
icebraining
_People should also do what they preach._

Why? If one is issuing mandates from a position of authority, I agree that
following what one imposes on others is essential, but in intellectual
discussion one should be free to argue a position and its opposite the next
minute. Anything less is downright dangerous for the group and society as a
whole. We can't depend on the half-dozen cranks that actually live their lives
swimming against the tide to argue for everything that is truly different, nor
should we trust their arguments just because they turn their crackpot theories
into practice.

------
cpr
Funny, I thought I read the Harvard endowment people _invented_ hedge funds, a
long time back, in order to maximize results. (My alma mater, so I may have
read that years ago in one of their publications.)

------
jfoutz
Reminds me of this charming but probably fake story about Oxford New college
[http://www.atlasobscura.com/places/oak-beams-new-college-
oxf...](http://www.atlasobscura.com/places/oak-beams-new-college-oxford) On
the other hand, the modern version, embracing risk and avoiding ethical
standards probably won't yield the thousand year endowment they're looking
for.

------
mishchea
Is it just me or does the article fail to mention/estimate/discuss how much
money the universities received _from_ hedge funds? It repeats over and over
again how much the schools _paid_ in managers' fees, but if the return was
several times that amount, then I guess I don't see the problem.

~~~
SilasX
If they did show that data, it would look worse. On average, universities _don
't_ outperform (far lower-cost) index funds with similar objectives, per the
recent HN story:

[https://news.ycombinator.com/item?id=11202349](https://news.ycombinator.com/item?id=11202349)

~~~
hkmurakami
Any discussions of returns must necessarily consider the risk incurred to
achieve that return.

~~~
SilasX
Sure, but (by most metrics) hedge funds are going to be riskier/more volatile
and you have to lock up your money for longer. So the same return would count
as _worse_ performance if placed in hedge fund (and that's not even accounting
for differences in expenses yet).

~~~
beeboop
Hedge funds as a group are only risky and volatile compared to mutual funds.
Their degree of riskiness varies tremendously, and there are a great number of
them that would offering investment management that is tremendously less risky
than an index fund.

------
chvid
I hear the next big trade is shorting student debt. Maybe they should go for
that.

------
hackuser
I generally don't support endowments. The ROI seems very poor: Only interest
on the investment will be used for the cause you are supporting, and it will
be for undetermined purposes in perpetuity. Also, a permanent source of
funding could be a very serious problem, creating a disincentive to change.

If you were investing for personal profit rather than to support a cause,
would you even consider an investment that offered those terms? Even fixed
rate investments return your principal eventually.

~~~
hkmurakami
Yes I would take the Yale endowment's 20 year risk adjusted returns in a
heartbeat.

------
epalmer
The University of Richmond has the Spider Management Company managing it and
other smaller endowments. Richmond has done well with its endowment.
[http://smc.richmond.edu/](http://smc.richmond.edu/)

As of 2015 its endowment was valued at $2.37 Billion. That with ~4,100 Full
Time Equivalent (FTE) students.

------
arca_vorago
So I wonder exactly how much universities doing this lost when LIBOR was
manipulated at the behest of the Bank of England because the Fed stupidly
decided the rate they would use would be set in England of all places,
essentially handing over monetary policy?

------
tsguo3
Would like to offer an argument that the Ivy League schools that hire hedge
funds also are very good at subsidizing tuition. When I went to Princeton,
only 40% of students paid the full "45k" tuition, and those were families that
were so well off that they don't mind the 45k at all. I would say the average
tuition paid at Princeton is closer to 20k. So there does seem to be such a
correlation: rich schools -> using HFs -> make a bunch of money -> fund
students from poorer backgrounds to attend the school.

------
madad5
I remember reading about rich US units back in 2011:
[http://www.theguardian.com/world/2011/jun/08/us-
universities...](http://www.theguardian.com/world/2011/jun/08/us-universities-
africa-land-grab)

No surprise here. They've been built to do this for years, apparently.

------
bhewes
I don't know how much this matters. Harvard has the richest endowment but
still has less money then nine individuals. I am just waiting for say the
Carlyle Group to go public like KKR or Blackstone to make HH funds boring and
mainstream.

~~~
narrowrail
You are in luck,

"In 2012, Carlyle completed a $700 million initial public offering and began
trading on the NASDAQ stock exchange on May 3, 2012."

[https://en.wikipedia.org/wiki/The_Carlyle_Group](https://en.wikipedia.org/wiki/The_Carlyle_Group)

~~~
maxxxxx
I didn't know they were public. Looking at the stock chart they don't exactly
kick ass.

~~~
jessaustin
From my limited exposure to them, they hadn't for some time before the IPO
either. The fact that they considered an IPO was probably a bad sign.

------
swiley
It's a shame more of it isn't going to financial aid. Maybe the universities
would do better investing in student run research.

