The admission, several weeks ago, that the endowment had lost a quarter of its assets, took down the icon a peg. Harvard, it turned out, had not discovered some magic way to make a ton of money without risk after all.
Now Edward Jay Epstein suggests that it's not as bad as all that . . . it's worse:
Harvard University's admission that it lost $8 billion from its $36 billion endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the loss between from July 1 through Oct. 31 2008. According to a source close the Harvard Management Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18 billion if the losses on the fund's illiquid investment are realistically appraised.
To be fair, the fund managers may believe, justly, that since the Harvard Endowment (unlike almost any other fund) can guarantee that it won't need to sell any of its illiquid assets any time soon, their valuation is closer to "true" value than a massive write-down. On the other hand, that's how we value funds--by what they could get now, not by what they might get at some unspecified point in the future. And it seems to indicate that Harvard was getting its high returns just like all the other financial firms were: by investing in risky, illiquid assets (including shares in hedge funds who did same). Their ability to massively diversify--again, much more than most funds who have shorter time horizons and narrower mandates--made that almost always a winning strategy. But as Brad DeLong has noted, in a financial crisis all correlations go to one.
It wasn't clear to me, either. My impression was that Harvard Management Company was highly regarded because Mohamed A. El-Erian managed a massive one-year return for them a few years back (on top of investment successes under previous managers). Nothing political about it. Sounds like you're just making shit up.
As mangers in many family offices and endowment funds seem to have forgotten, the proper mangemjent valuation of an endowment fund is the present value (in real terms)of its expected future income stream. The mark to market valuations which were the boast of people around Harvard Management Corporation were and are irrelevant to how well they are doing their job.
Were I one of Greg Mankew's Harvard colleagues, I would be disturbed if the endowment fund managers are letting out no leaks about the effect of the crash on future income.
If they only lost 25% of their value when the market as a whole lost about 50%, I'd say that's a pretty good set of investments... though if it lost 50% (like Epstein says), it's about even with the market.
I agree with Joel that Megan has set up a straw man here. I can't recall ever thinking or reading that Harvard's investment successes were a rebuke to capitalism in any way: they were (duh!) a successful deployment of capitalism in support of what we hope are noble goals.
Great Post, thanks
Merry Christmas
If we used this logic then we'd price mutual funds based on what they could liquidate all positions for today. For example if the Megallan Fund sold every position today it would get terrible pricing for its holdings. To mark to market assets based on some mass redemption in a short period of time isn't really fair value or accurate.
Megan - I enjoy your blog generally, but you would risk substantially less of your credibility if you stuck with topics you have the faintest idea about.
In some way that is not quite clear to me, the vast and shadowy operations of the richest and most elitist university in the United States--quite possibly in the world--was supposed by many liberals of my acquaintance to be a rebuke to Wall Street, and capitalism more generally.
The problem seems to be that many liberals of your acquaintance are retarded. I'll thank you not to paint all of us with that brush.
Greg Skidmore - The funds are valued based on the market value of their assets. In other words if they could sell all the assets at the current market price, what would they get. Of course the less liquid the asset, and the bigger their holding, the less likely it is that they would get market price if they had to dump it all suddenly.
TJ I think it's rather an accurate overview of liberal opinion on financial matters. Like most everything here, only the few liberals who aren't insane on any given issue post, along with a few trolls.
Fun thing to do in limousine liberal circles, or when dealing with trustafarians, ask them to explain why their manager is so awesome but "the system" is so evil... even better when said liberal is a banker or hedgie themselves. Lots of stunned gazes and embarrassment. 2nd shot is "if you're working to subvert the system, how do you know that you will be able to do anything that comes close to ameliorating the damage you claim to be doing?" But then I'm a truly evil bastard who enjoys tormenting liberals, especially of the limousine type. But I've always hated anyone who aids and abets genocide, thus why liberals are on my sh*t list.
The people who made the legendary gains left Harvard a few years ago. They founded a new hedge fund, Convexity Capital. I saw a presentation from them at Sloan Business school last month and they're up quite a bit this year (following a couple years of slightly below-average performance).
Here's a link about him leaving:
http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050112_5034_db016.htm
How do you replace Babe Ruth? That's the dilemma facing Harvard University, following the Jan. 11 announcement that Jack R. Meyer, the legendary CEO of the in-house firm that manages Harvard's endowment, will be stepping down this summer.
I don't see anything googleable regarding their current performance, so you'll just have to take my word for it I guess.
I always had a related problem with how the net worth of the extremely wealthy is reported. Like, you always read Bill Gates is worth x billion dollars... but I assume a decent percentage of that net worth is in Microsoft stock, and if Gates suddenly dumped it all the price would fall considerably. So isn't it inherently overstated? That's probably less of a problem with somebody who's more diversified, like Warren Buffett... but even there, I imagine if he tried to cash out that very act would cause his portfolio to be worth much less than it is at current prices. Or do they try to figure for this kind of thing when estimating personal wealth?
"And it seems to indicate that Harvard was getting its high returns just like all the other financial firms were: by investing in risky, illiquid assets (including shares in hedge funds who did same)."
Not all illiquid assets are risky: some are just illiquid. For example, timberland generally isn't considered inherently risky, but it is illiquid, and both the Harvard and Yale endowment funds have invested in it in recent years. Since the pricing of illiquid assets is somewhat subjective, I would take Epstein's source's appraisal of those illiquid assets' performance this year with the same grain of salt that I take when reading about the great performance of the Harvard and Yale endowment funds over the years. To the extent that they've been invested in somewhat subjectively-valued, illiquid assets, the quoted returns are somewhat subjective too.
The Harvard Endowment fund was an early adopter of hedge funds. Now it must be stated that most hedge funds don't hedge. They are leveraged speculative pools who took advantage of the modern technology of trading and the modern financial instruments that multiplied for the last dozen years.
Harvard's genius, such as it was, involved identifying the mania and embracing it. Even if they lose half of it their long term performance will be pretty good. 75%, not so much. But what exactly have they lost? Nothing really. It was all illusion.
Well I guess I should say they have lost their illusions. As has or soon will, everyone.
Their total enthusiastic embrace of the mania was in itself causal in the rise of hedge funds. Their widely touted performance was the best advertising the industry ever got. Lending a huge layer of respectability to the geeks, grifters, con men, shills and whores who were more than happy to take every billion they could get their hands on and leverage it 30 times with money supplied by Wall Street. Wall Street which not coincidentally was manufacturing the exotic paper the hedgies were buying.
Why exactly does Harvard need $36 billion dollars anyway. Reluctantly they did agree to start helping a few more students with grants and scholarships recently. A few hundred we can suppose. How thoughtful.
The number was beyond absurd. On it's very face it had to be phony, and so it was.
Wow, Megan just knows all these liberals who are getting their comeuppance nowadays. I know I'll personally never go around bragging about Harvard's investment prowess again, or at least I won't wear love beads and a Che t-shirt while I do it.
"...richest and most elitist university in the United States"
Most elitest?? These guys took my son, kept him for 4 years, and awarded him a bachelor's degree. MY SON. Have you MET my son? If that doesn't cut against the "most elitest" label, I can't imagine what does.
And by the way: shouldn't that be "elitestest"?
"The problem seems to be that many liberals of your acquaintance are retarded. I'll thank you not to paint all of us with that brush."
And I always find it lovely when people use the word retarded pejoratively, referring to a group that cannot even defend themselves. With what brush did you just paint yourself, TJ? The one that thinks that making fun of retarded people and others' beliefs is sporting good fun?
Actually, word from winter break interviews around the globe is that HBS students are now telling the world that word is out on Business School campus that Harvard is offering to sell its illiquid investments- timberland, hedge funds, private equity funds..etc at half price but there are no takers.
The need to sell such illiquid assets NOW plus the fact that Harvard just issued about $2.5 Billion in bonds suggests the university may be in a cash crunch, too.