In a bleak year for most money managers, the folks who run Harvard University's $35 billion endowment, the equivalent of a massive, well-diversified hedge fund, picked a bushel of winners. The endowment posted a reported 7 percent to 9 percent gain on holdings.
"That would be easily the best performer among the foundations and endowments that we track," Chicago Northern Trusts, Craig Tome told The Wall Street Journal.
Tome tracks endowment and pension fund performance of some 90 endowments and foundations for Northern Trust bank of Chicago. Each portfolio has an average of $1 billion under management.
The average loss among the portfolios monitored was 3.1 percent for the previous fiscal year, and only 20 percent of them posted winning results. The losses reflected the generally feeble state of the U.S. economy.
Yet the Harvard endowment racked up handsome gains, despite falling equities markets, the subprime meltdown, and other financial train wrecks.
One aspect of Harvard's success this year may be its unusual investment procedures. The endowment employs in-house managers, and also uses outside investment firms and fund managers. This may provide both a diversity of perspectives and portfolios.
Typically, an endowment allocates all its investment money to outside firms.
Driving up yields for Harvard were its investments in commodities, Treasuries, and a select group of hedge funds with healthy returns.
Here are some specifics on what Harvard held in its various in-house and outside portfolios.
Early in its fiscal year, Harvard allocated 17 percent of its portfolio to commodities, including timber. Commodity prices ran up substantially almost across the board in 2008 until a July selloff.
Harvard also had holdings in farmland.
Institutional portfolio managers typically avoid large positions in commodities because of the sector's volatility and unpredictability. There are too many variables in play for commodities to qualify as a conservative investment.
Still, the apparently intrepid, or prescient, Harvard endowment took a large fraction of its positive gains from their commodity holdings.
Harvard also invested in Convexity Capital, a private hedge fund which made money for the university on options-based trades, which are potentially profitable moves if the option buys are made on the winning side of a whip-sawing market.
Convexity Capital Manager Jack Meyer, who once ran Harvard's portfolio, reaped additional profits by foreseeing the impending collapse of the subprime mortgage markets.
Also profitable for Harvard were investments placed for it by Baupost Group, a Boston firm that posted a gain of 52 percent-plus. Baupost bought credit-default swaps which insured mortgage-backed securities and corporate bonds.
A reported outsized stake in Treasuries, with their better-than-the-market returns, also added to Harvard's bottom line.
There was also at least one reported loss among Harvard's outside investment firms. Hedge fund Sowood Capital Management, run by founder Jeffrey Larson, another one-time Harvard endowment manager, posted a loss after several successful seasons for Harvard. The fund was recently sold to Citadel Investment Group.
Although Harvard's 7 percent to 9 percent return on $35 billion is serious money, Harvard's endowment portfolio returned an average of 15 percent for the past 10 years.
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