How Much Has Harvard Really Lost?

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 sure, the highly-talented-- and highly- incentivized- MBAs at HMC did exceedingly well for Harvard during the early years of the new millennium. From 2000 to 2008, they more than quadrupled the notional value of Harvard's wealth through a strategy that involved shifting the lion's share of Harvard's money from American stocks, bonds and cash to to highly esoteric investment which were not only illiquid but whose imputed value often could not be easily determined by outside parties. So, by the time the bubble burst in the fall of 2008, less than a fifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds. Where was the rest of Harvard's money? Nearly 28% of Harvard Endowment fund was in what the fund manager's called "real assets," a category comprised of timber forest and arable land in remote areas, commercial real estate participators, and huge stockpiles of oil and other physical commodities. Such "real assets" plunged in value, if they could be sold, much more severely than the stock market averages. Oil, for example, one of the fund's largest investment, lost about t two-thirds of its value. Another huge chunk of the endowment was in private equity placements and hedge funds which imposed restrictions on withdrawals. In the case of so-called "gated" hedge funds, some of which suffered enormous losses, Harvard could only extract its investment by selling its participation at a steep discount to a "secondary" hedge fund. Another 11 percent of Harvard's money had been sunk in volatile emerging markets. Here the investments took a double hit: First, the local stock markets collapsed in most of these countries, with, for example, Russian stocks, losing 80%, of their value. Second, on top of these losses. the local currencies lost much of their value against the dollar, with the Brazilian Real, for example losing 40% of its value. Given the true cost of getting its money out of this financial exotica, my knowledgeable source finds the claim by Harvard's money managers that the fund only lost 22 percent not only "purely pollyannaish" but self-serving (they got increased bonuses for 2008). But while Harvard's money managers may chose to look through rose color glasses at the value of their portfolio , Harvard University, which relies on the interest from its endowment fund for one-third its budget, needs to be more realistic. As its President, Drew Faust, noted in letter to the Harvard faculty, "We need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constrain,"

The collateral damage goes far beyond the ivy-covered walls of Harvard. Money managers at other non-profit institutions, no doubt inspired by the dazzling success of the Harvard Management Corporation in rapidly multiplying the notional value of its endowment fund adopted similar strategies, including plunging their funds into the murky get-rich-fast universe of illiquid investments. Consider, for example, the adventures of Calpers, the giant pension fund of the California Public Employees' Retirement System, I which heavily invested in the same sort of "real assets" as Harvard. Leveraging its own funds, It bought so much undeveloped real acreage, that by 2008 it became the largest private land owner in America, and as the real estate bubble expanded, it marked up the notional value of its portfolio accordingly. Then came the subprime debacle, and the real estate bubble imploded, leaving Calpers with unsalable land and, because of its borrowed funds, a 103% loss. Together with other losses in hedge fund and conventional investments, Calpers found that it had lost nearly 40% of the value of its entire pension fund. In Calpers's case, it had little choice other than to realistically report its enormous losses since it had pension obligations that now might require raising money from local governments in California. Other nonprofit funds with more leeway, such as Harvard, have yet to fully come to grips with the problematic value of their illiquid investments.

Comments

[leeannethethird]

So much for Harvard alum insiders who've been as competently running think tanks and the American exploitation enterprise.

[krak2oc]

What I don't understand is why did they (and all the charitable organizations that lost money by investing) invest over 30 BILLION dollars, instead using that money to help poor students get into Harvard. I just don't get it. What was that money to be used for? Just investing and reinvesting? Just so they can say that they are worth billions of dollars? Should they use every dollar they get for good causes? to educate our deserving students? What is the reason behind this? Why would charitable organization have billion or hundred of millions of dollars in investments? We give money to charity to be used not to be invest.

[NoPCZone]

I have yet too see anything of recent vintage that came out of Harvard that impressed me. The only thing offering more encouragement would be if they went insolvent.

Ivy grows on static surfaces and the world is in continuous motion, subject to continuous change. Why would one want to subject their mind to such a place?

The rep is greater than the fact. Dubya is a prime example.

[KillTheMessenger]

Here is the good news... for $8 billion the Chinese can educate 300,000 students from K-PhD. And they will. So if you need scientists, all you have to do is to ask. They Chinese will send some over.

:-)

[TJCole]

Harvard gave G.W. Bush and Master's Degree..!

So it goes to show you, "It all comes back..!"

As Paul Butterfield would say...

[ConcernedAboutRFuture]

Oh no!!! How will it ever afford to produce more thieves on Wall Street, more silver spooners and more of what is bringing this country down fast??!!!

[Thermodynamics]

Since the recent financial problem started I have been looking for parallels to the Great Depression.
People were hurt by the drop in commodity prices in 1928, sometime before the crash in 1929.

[HeevenSteven]

How many universities still have 18 bil in the bank? Ain't 'zactly hard times yet..

[joebhed]

I'm not sure about the karma thing, but I think I do agree.

The curriculum of Harvard Business School is the same as the somewhat lesser knowns.
It could be described as maximize profits in the shortest term possible.

All those schools teach you very well how to increase your money according to the latest and most innovative financial business schemes out there.

Emerging markets, hedge funds and volatile commodities are signals of an investment strategy that is pro-cyclical and thus lacks a long-term perspective.
Ouch. That hurts.

It is more than ironic that the business school success in teaching the smartest and richest among us the best means to achieve their financial salvation is the exact cause of the apparent demise of same institution.
This result for HBS is, in and of itself, proof of the wrong-headedness and immorality of its teaching methods and its business model.
Harvard Business School bet its future academic advances on the deregulated financial services of you know friggin who.
We can expect no better from Obama.
Nor from Harvard.
So, if the HBS business model is friggin toast, then what are they going to teach in the future?
Better call in some high-paid professors.
You know, the ones that haven't moved on to Obama.

[nanie]

Interesting comments from someone who clearly has never attended Harvard Business School, hasn't spoken much with people who have, and hasn't clearly done the research that the feign to know.

I am a student at HBS, and I have yet to be taught to maximize short-term profitability. In fact, the vast majority of my learnings have centered around ethical leadership, long-term value creation and designing the correct incentives for employees to engage in responsible, legal, ethical and moral behavior.

Perhaps you should sit in on a class-- we "wrong headed and immoral" future business leaders would love to open your eyes to the truth of our education, which has, in many, many more cases than the opposite, created wealth, opportunity, and responsible management that several people have reaped the rewards of.

[KillTheMessenger]

He can't afford to sit in on a class. Neither can most people. You are basically talking to people who have been priced out of a first class education. And it shows.

I happen to have seen some of what the HBS teaches and I am sure there will be some highly enjoyable analysis going on over there, right now. All of which will be lost to the masses, of course, because they can not afford to pay a quarter million dollars for an MBA.

:-)

[joebhed]

nanie,
I made broad comments about the business model at HBS because HBS is the subject of Mr. Epstein's post.

I have known many graduates of allS's.
I openly disparage the business school curriculum.
All of them.

Why is it that you believe the HBS students can open my eyes, and not the other way around. Are you all any different than the previous generations of students I have known?

You can educate me right here. Hopefully, vice versa.
The claim that your education creates wealth, opportunity and responsible management is really kind of lain bare by the fact of the article.
The best and brightest who run the endowment fund investments ran that fund into the ground.
As a student, you ought to hold them responsible, not defend their actions.
The list of investments made by the MBA brainiacs shows that my comment is on target.
'financial exotica', not my term.

Bring my comment to your monetary economics teacher for a reality check and ask for an opportunity to address your class on monetary policy and the money system.
I will discuss an aspect of monetarism that spans Milton Friedman, Ludvig VonMises and the Chicago School economists that advised FDR on the Chicao Plan, all with a view to addressing the horrific end game that the BS's have wrought upon the population.
That is my challenge to you, nanie.
You can sit in on my class.
Respectfully submitted.

[spinns17]

alot of these crooks came from there school.payback

[jhamm1]

"To be sure, the highly-talented-- and highly- incentivized- MBAs at HMC did exceedingly well "

Case in long overdue point, the words talented and Harvard simply don't go together in the same sentence. And thus, it appears that in some way the workings of karma are beginning to visit themselves upon the world's most overrated learning institution.