財經觀察 1526 --- Harvard veritas - FT

There’s more than a bit of situational irony that just as hedge funds’ idolisation of the US endowment model reaches fever pitch, Harvard’s $35bn endowment fund announces it’s having some difficulty.

Via Business Sheet, a letter from Harvard President Drew Faust:

For all the challenges such circumstances present, we are fortunate to be part of an institution remarkable for its resilience. Over centuries, Harvard has weathered many storms and sustained its strength through difficult times. We have done so by staying true to our academic values and our long-term ambitions, by carefully stewarding our resources and thoughtfully adapting to change. We will do so again.

But we must recognize that Harvard is not invulnerable to the seismic financial shocks in the larger world. Our own economic landscape has been significantly altered. We will need to plan and act in ways that reflect that reality, to assure that we continue to advance our priorities for teaching, research, and service.

Our principal sources of revenue are all likely to be affected by these new economic forces. Consider, first, the endowment. As a result of strong returns and the generosity of our alumni and friends, endowment income has come to fund more than a third of the University’s annual operating budget. Our investments have often outperformed familiar market indexes, thanks to skillful management and broad diversification across asset classes. But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody’s, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.

Notwithstanding Faust’s homage to Moody’s (there’s a literary joke in there somewhere), the prospect of a 30 per cent decline in value is scary stuff for a fund used to returning an average 15 per cent each year. The fund managed to return 8.6 per cent in the year ending June 30, according to Bloomberg — still beating the 13.1 per cent loss of the S&P in the same period.

That success would have come from a non-traditional asset mix of something like 34 per cent stocks, 16 per cent bonds, 18 per cent hedge funds, 17 per cent commodities and 11 per cent in buyout funds (at least, that’s where it stood as of Aug. 1). Arguably, as many as four of those categories (stocks, hedge funds, commodities and buyout funds) are now getting clobbered.

Merrill Lynch has this handy chart of the asset allocations of the 33 US endowment funds over the past 10 years:
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You can see allocation to hedge funds has grown rapidly, mostly at the expense of fixed income and equities.
ML also notes the larger the endowment fund, the more tends to be invested in alternative assets — usually about 34.5 per cent, compared to the average for all endowment funds of about 15 per cent. Another bit of irony, then — the smaller funds, with less exposure to hedge funds and private equity, if not necessarily stocks, may be doing better than their bigger peers:

Historically, the larger Endowments (ie, >$1bn) have significantly outperformed the entire average2 (Chart 18). There are several reasons for this outperformance, with a large portion of their relative success attributable to their sizeable alternative allocation (34.5%) verses the entire universe of US Endowments (15.3%).

Doubly ironic given that much of Harvard’s success has been down to the sheer size of its capital and first to market advantage — two things it may be losing now that hedge funds have started imitating the model and donations are drying up.

The Epicurean Dealmaker puts it well:

It can be awkward and uncomfortable to rely on the kindness of strangers, especially when most of those strangers are either tapped out, over-leveraged and desperate themselves, or more focused on paying the mortgage and the grocery bills than buying another Rembrandt etching for the university art museum. Harvard will be lucky indeed if charitable donations do not drop by 50% or more this year, and government grants become a relic of the past. You can bet that Ms Faust and her minions are spinning rapidly into action to forestall the evaporation of millions of dollars in pledges made in happier times and to beat the bushes for those increasingly rare individuals who still have the wherewithal to underwrite the third biochemistry lab on campus. The John Paulson Real Estate Sciences Building, anyone?