Harvard Endowment Looks to Become More Liquid

Posted on 25. Jun, 2009 by Kyle Waller

The managers of the Harvard Endowment have long been hailed as innovators. Their alternative investments include commodities like timber (famously employing lumberjacks), private equity, and hedge funds. 

Recently, I’ve seen it reported that Harvard’s endowment portfolio performed well during 2008 because of alternative investments.  As it turns out, the reporter meant their fiscal year 2008, which ends in June. It was a perfect time to end the year, right before all asset classes lost significant value…great reporting.

So, as a follow-up to that original article, let’s look at fiscal year 2009. 

The Wall Street Journal reported today that one of Harvard Endowment’s top bond managers made $6,300,000 last year, managing the fixed income portion of the now $37 billion fund. It has been announced that this manager is leaving the endowment. Why?

The endowment is forecasting one of its worst years, down almost 30% at the end of June and is positioning itself to become more liquid. 

This move to become more liquid is the result of being very illiquid in the past.  So much so that during the credit crisis, the school had to make cuts, lay-off employees, and borrow money due to the endowment being tied up in illiquid investments like hedge funds and private equity. 

The school and endowment like other schools’ endowments have more problems than I have quickly mentioned.  It seems that the endowment, created to provide for the schools needs (the school gets 34% of its revenue from the endowment), is now in a way holding the school hostage. 

Before the credit crisis, the endowment’s illiquid investments helped the portfolio to average 14% annually. This over allocation (greed) ended up hurting the school.

This shows that there is a deeper problem in the financial services industry and should bring up the question; who’s serving whom?