

The Inside Story of Harvard's Finance Meltdown - Flemlord
http://www.forbes.com/forbes/2009/0316/080_harvard_finance_meltdown.html

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mkuhn
Another article on the same subject:
[http://www.nytimes.com/2009/02/21/business/economy/21harvard...](http://www.nytimes.com/2009/02/21/business/economy/21harvard.html?_r=2&src=SkimHP&pagewanted=all)

I found the one from the NYT the better read.

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markessien
This just seems distasteful. A university should not be a business, because
businesses will always default to whatever makes the most money. And
sometimes, this is not the same as what is best for the students.

~~~
sho
I agree. What kind of "non-profit" organisation is paying its money managers
$35m/yr to push its earnings to 20+%? That's not an educational endowment,
that's a hedge fund, and an out-of-control one at that.

Oh well, seems like they've learned their lesson now. Eleven billion lessons,
in fact.

~~~
neilc
_That's not an educational endowment, that's a hedge fund_

Would you prefer if Harvard invested their endowment in a collection of
outside hedge funds, the managers of which might easily be making $35m/yr?
It's just a question of outsourcing vs. insourcing -- either way, Harvard
wants to generate income from their endowment, and compensating the people
with the skills to maximize endowment income is a perfectly rational thing to
do.

 _seems like they've learned their lesson now_

Not really; they just invested unwisely. The basic principle of trying to
maximize endowment income via professional money managers is one that I'm sure
Harvard would continue to embrace, as would any university with a large
endowment, or any number of pension funds and non-profits with investment
portfolios.

~~~
sho
I disagree. The point of a non-profit is not to seek to increase its net worth
by aggresive market speculation. In fact, that seems like the very definition
of _for_ -profit!

I am hardly an expert on such things but I would presume that the donors over
the years to the Harvard Endowment might have had some expectation that their
donations would be put to use futhering the university's academic aims, not as
chips on a fund manager's gambling table. This is why people give to non-
profits!

Some gain is necessary to counteract inflation, of course, but T-bills or
straight banking would have sufficed for that. Otherwise they should stay out
of aggresive wealth maximisation. _It's not their money_. And if it is their
money, they should be taxed on their income like any other enterprise.

~~~
neilc
_I would presume that the donors over the years to the Harvard Endowment might
have had some expectation that their donations would be put to use futhering
the university's academic aims_

Naturally -- what else do you think the endowment is for? Like any big
university, Harvard takes endowment money, and invests it in such a way as to
maximize returns. Some of those returns are reinvested in the endowment, and
the rest are used to support the university. A higher rate of return on the
endowment fund is directly and obviously connected to higher spending on the
university's academic aims.

 _Some gain is necessary to counteract inflation, of course, but T-bills or
straight banking would have sufficed for that._

You don't seem to understand the basic idea behind an endowment. If Harvard
didn't earn a reasonable rate of interest on their endowment, they would
quickly exhaust it at their current rate of spending. Simply "counteracting
inflation" but not seeking a competitive return on their endowment would be
grossly irresponsible, not to mention wasting a vast amount of capital that
could be put to better use.

As for the taxation question, I'm not sure how much tax Harvard has to pay.
But they do have to comply with various legal requirements on how much money
they pay out from their endowment each year vs. reinvesting it.

~~~
sho
_"A higher rate of return on the endowment fund is directly and obviously
connected to higher spending on the university's academic aims."_

Well yes, but where do you draw the line? At what point does an endowment
become a safe, constant feed from the ROI on donations from students past, and
turn into a wealth fund for its own sake? In my opinion, by the time you are
paying the university's money managers far, _far_ in excess of what its own
academics could ever hope to earn, you have crossed that line.

I see parallels here between the Harvard example and, say, the Singapore
Government's Temasek Holdings, noted for its aggresive investment strategies
with public money.

 _"You don't seem to understand the basic idea behind an endowment. "_

Sorry. I should have written "at replenishment rates" or similar. I wasn't
thinking.

 _"not seeking a competitive return on their endowment would be grossly
irresponsible"_

Yeah well, who's irresponsible now? What do they say to someone who reached
deep and gave a hundred K or so to express their thanks and hope to guarantee
the university's future academic service? Oops, we just lost 80,000 times your
donation through irresponsible speculation, can we have some more please?

I understand your points, and can agree to some extent, but I can't help but
think they went _way_ too far. I must admit my thinking is probably shaped by
coming from a country where universities are considered public institutions
and these endowments are almost unheard-of, so my comments probably lack
nuance in the American context.

In fact, I find the whole thing vaguely obscene. Harvard sounds like a huge,
voracious hedge fund with a small side business of maybe running a university
with some of the profits. How can such a thing be? What is their charter? What
if they bought up smaller universities and closed them down? Isn't that within
their interest, too? Should we allow them this kind of power? Is it wise to
allow academic institutions to focus on wealth creation first, actual
education second? Does the success of failure of a university now come down to
how well they manage their investments, not the quality of their tuition?

I am reminded of some of my qualms with other non-profit groups. World Vision,
for example, behaves in what I would say is a similar manner - the vast
majority of donations they receive get ploughed straight into fundraising and
advertising, in the hope of increasing the next round of donations. While this
does make sense in a perverse, narrowly-focused way - they are only trying to
get even more money for the children, after all! - the fact remains that their
chief activity seems to be hiring ever more people and undertaking ever more
overhead to increase their cashflow, and the starving children, etc, are
merely the general theme of the never-ending story. I have a deep distrust of
these institutions, especially non-profits, whose behavioural aims first and
foremost appear to be self-perpetuation and endless growth, while their stated
goals upon which their non-profit charter is hitched take a distant second
place.

Ah well, probably comes down to philosophical differences, like everything
seems to. Not really trying to vastly increase the scope of the discussion,
just thinking out loud.

~~~
neilc
_In my opinion, by the time you are paying money managers far, far in excess
of what any academic could ever hope to earn, you have crossed that line._

Yeah, there is certainly a legitimate question about whether the high rates of
compensation across the entire finance industry are justified, and correlated
with improved job performance.

 _What do they say to someone who reached deep and gave a hundred K or so to
express their thanks and hope to guarantee the university's future academic
service?_

Well, they did earn an annual ~15% return for the past 15 years, which is a
pretty stellar record; the recent financial turmoil was hard for anyone to
predict. But sure, you've definitely got a point: the Harvard money managers
screwed up bigtime, and took on far too much risk. My point is that I have no
problem with the Harvard endowment being run as a private hedge fund in
pursuit of good returns at an acceptable level of risk, and being compensated
at about the same level they'd get in the private sector. The problem is they
just ran the fund _incompetently_.

