20 ms·

Universities Are Becoming Billion-Dollar Hedge Funds with Schools Attached

397 points by ShaneBonich 11y ago

teaman2000 11y ago
The issue is not so much that schools invest in hedge funds (the endowment managers are just trying to maximize returns), but that the endowments pay out such a small percentage of their funds each year to support research, financial aid, and everything else. Harvard pays out only 4-6% of the endowment yearly. On their huge endowment, if they increased the payout by .5%, they would have a whole lot more to spend on worthy activities instead of saving for the year 3000.
- cheez 11y ago
  History shows that world changing research and ideas are spread out over decades, if not centuries. By planning to be around in the year 3000, they're making sure that they can contribute.
- CompelTechnic 11y ago
  I think saving for perpetuity is a good idea. Lots of endowment money lives for centuries in these institutions, spitting off gains- it would be selfish of a particular generation to draw this fund down excessively. Considering long-term real rates of return on a diversified portfolio, a 4% annual withdrawal rate (the "4% rule") is advocated for most retirees- and they only have to make their nest egg last 30 years. What sort of signal would that give to charitable givers to the university when it decides to start taking 8% per year, and seeing the money exponentially decay? I'm in no position to donate a large amount to a university, but if I were I would imagine that I would like to see it live on, not wither on the vine.
- bpodgursky 11y ago
  This is incredibly shortsighted. The point of an endowment is not to pay it off, the point is that the endowment persists indefinitely, and the interest / returns fund operations. If people wanted to contribute directly to a university, they can. Instead they're contributing to the endowment. Respect that choice. It's pathetic that universities have actually set up a sustainable source for funding scholarships etc indefinitely -- where spending caps are actually restricted -- and the vultures immediately descend to suck it dry and spend it off. And then in a few decades when it's gone: ???
  - toomuchtodo 11y ago
    What if university endowments were used to fund research and implementation into ways to drive down the cost of education to zero?
    - Zigurd 11y ago
      Like edX?
    - c0g 11y ago
      Because whatever the idea is, it probably won't work and then there wont be free education or any money.
      - toomuchtodo 11y ago
        I find your comment ironic on a forum sponsored by an entity that funds "creative destruction" of existing market spaces.
    - aroberge 11y ago
      Endowment funds are accrued through donations. The vast majority of donors would have no interest in giving money towards operational costs; they are interested in something that can be seen as a legacy.
    - leakybit 11y ago
      The internet has already driven the cost of education to zero, what schools are really selling are degrees. Anyways, Yale only spends $170 million on tuition assistance, but in reality ; Yale covers full tuition and housing costs for students who's family income is less than $200,000.
      - wallacoloo 11y ago
        > The internet has already driven the cost of education to zero [...] For things like CS, sure - mostly. Excepting for slightly niche areas like embedded programming, you can achieve similar experience for $0. But for most other [engineering] degrees, this isn't true. You can't tape out a custom integrated circuit (IC) for free, but this is something some EE undergrads get to do at brand-name universities. Even the licensing cost of the software used to design those ICs can reach six figures. I imagine there are similar things with chemistry, material science students and especially medical students. But yeah, even in those other engineering fields, the internet has reduced the cost of education.
- thefastlane 11y ago
  > "the endowment managers are just trying to maximize returns" respectfully, the article paints a much darker and more insidious picture than that.
  - blakesterz 11y ago
    It seems to paint the picture that they're trying maximize the money they (the managers) make, not necessarily the returns.
    - deleted 11y ago
      [deleted]
- deleted 11y ago
  [deleted]
- hkmurakami 11y ago
  Harvard's history is longer than that of the United States. Planning for year 3000 seems perfectly prudent, and honestly, responsible behavior.
- nicobn 11y ago
  4%-6% is almost certainly sustainable. Higher pay outs expose Harvard to wealth dilapidation. Companies, institutions and even empires come and go. The most successful adhere to conservative governance and plan for the next century, not the next semester. Harvard was founded in 1636. So far, it has survived 380 years. That's pretty impressive.
- johnloeber 11y ago
  You are now encountering the concept of a safe withdrawal rate. If you have money and want to spend it effectively, the best course of action is not to immediately spend it all, but to invest it. Then, once a year, you'll want to take the profits, reinvest a sufficient amount such that your capital doesn't depreciate due to inflation, and then to spend the rest. A more conservative strategy would have you reinvesting even more. What's the point? Well, suppose you have $100. You could spend it all now. Or you could invest at a 7% profit rate, reinvest 2% for inflation, and then spend the remaining 5%. This lets you spend $5 a year, inflation-adjusted, for the foreseeable future -- so if your timeframe is longer than twenty years (20x5 = 100), it makes sense. That's not to mention that having a lot of money in investments gives a school substantial practical/political power.
  - 77pt77 11y ago
    > Or you could invest at a 7% profit rate Tips welcome.
    - jldugger 11y ago
      Broad market indicies like S&P500 are regarded as having a 7 percent return after adjusting for inflation.
      - 77pt77 11y ago
        According to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... from 2006-2015 the SP500 had a geometric yearly mean return of 7.25%. according to http://www.usinflationcalculator.com/inflation/current-inflation-rates/ http://www.usinflationcalculator.com/inflation/current-infla... The average inflation for that period is 1.9% so you get roughly 5%. Still pretty decent.
        jldugger 11y ago
        We're talking longer than 10 years here. A better estimate might calculate the average 10 year return for every 10 year return period, and the standard deviation of that same data set. And then do that calculation for 30 years. I believe you end up with a higher average and smaller deviation at 30 than 10.
inthewoods 11y ago
I've been waiting for this article to surface on HN. The other problem here is that hedge funds, as an investment vehicle, really haven't done that well. So it is essentially a transfer of donations to the hedge fund industry while the endowment could have done better avoiding them altogether. Obviously there are some hedge funds that have done well - but on the whole they are expensive and do not add alpha. Back in the day, Harvard didn't outsource to hedge funds but instead had the portfolio managers in-house. These folks were paid a small fraction of what they would make in the private hedge fund industry, but my understanding is that the Harvard community was up in arms at what they were making - so they quit/got pushed out and then Harvard started outsourcing to hedge funds. The result was worse performance and higher fees. Of course, it's not all roses - Larry Summers famously made a terrible bet on interest rates that Harvard had to unwind at a large loss.
- digikata 11y ago
  Is the outsourcing somewhat recent? I've been reading through the actual text in the Piketty book and he discusses the relative advantages of large university endowments vs smaller ones. He has a data table in it for 1980-2010 where the returns seem pretty reasonable (but much higher for larger account balances of Harvard-Yale-Princeton). http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf People can argue about his book's overall points, but few can argue that he's accumulated a lot of interesting data. I've been trying to reconcile that data with the Buffet view of complex hedge funds not beating straight index funds for gain... and by some other data Buffet is correct.. but the risk profiles may differ (Though it often feels like "risk" is the financial industry equivalent of engineering fudge factors).
  - inthewoods 11y ago
    That's a great question - when I was in the industry (back in 2005-2006) Harvard had already outsourced a large portion after their managers left. In many cases, the managers started up their own funds and then Harvard immediately placed money into them. I think the answer may be that Harvard (and others) continue to see decent returns - the question is at what cost relative to managing it internally.
mishchea 11y ago
Is it just me or does the article fail to mention/estimate/discuss how much money the universities received _from_ hedge funds? It repeats over and over again how much the schools _paid_ in managers' fees, but if the return was several times that amount, then I guess I don't see the problem.
- SilasX 11y ago
  If they did show that data, it would look worse. On average, universities don't outperform (far lower-cost) index funds with similar objectives, per the recent HN story: https://news.ycombinator.com/item?id=11202349 https://news.ycombinator.com/item?id=11202349
  - mishchea 11y ago
    The article focuses on universities' investments in hedge funds specifically. The numbers in the article suggest that on the high end, about 10–20% of an endowment will be in a hedge fund. The question I have is, what are the typical returns just on that 10–20% investment? The endowment can do poorly (as bad as or worse than an index fund) as a whole, even if the investment into hedge funds is paying out well.
  - hkmurakami 11y ago
    Any discussions of returns must necessarily consider the risk incurred to achieve that return.
    - SilasX 11y ago
      Sure, but (by most metrics) hedge funds are going to be riskier/more volatile and you have to lock up your money for longer. So the same return would count as worse performance if placed in hedge fund (and that's not even accounting for differences in expenses yet).
      - beeboop 11y ago
        Hedge funds as a group are only risky and volatile compared to mutual funds. Their degree of riskiness varies tremendously, and there are a great number of them that would offering investment management that is tremendously less risky than an index fund.
jfoutz 11y ago
Reminds me of this charming but probably fake story about Oxford New college http://www.atlasobscura.com/places/oak-beams-new-college-oxford http://www.atlasobscura.com/places/oak-beams-new-college-oxf... On the other hand, the modern version, embracing risk and avoiding ethical standards probably won't yield the thousand year endowment they're looking for.
bhewes 11y ago
I don't know how much this matters. Harvard has the richest endowment but still has less money then nine individuals. I am just waiting for say the Carlyle Group to go public like KKR or Blackstone to make HH funds boring and mainstream.
- LAMike 11y ago
  How would that make HH's less boring?
- narrowrail 11y ago
  You are in luck, "In 2012, Carlyle completed a $700 million initial public offering and began trading on the NASDAQ stock exchange on May 3, 2012." https://en.wikipedia.org/wiki/The_Carlyle_Group https://en.wikipedia.org/wiki/The_Carlyle_Group
  - maxxxxx 11y ago
    I didn't know they were public. Looking at the stock chart they don't exactly kick ass.
    - jessaustin 11y ago
      From my limited exposure to them, they hadn't for some time before the IPO either. The fact that they considered an IPO was probably a bad sign.
  - bhewes 11y ago
    Ha, that is what I get for not paying attention over the past four years.
lr4444lr 11y ago
Sidenote, and I may get down-voted heavily for saying this, because he's got plenty of "cred" on so many different fronts, but Noam Chomsky always struck me as a hypocrite when it came to his economic and political thinking for taking a pension supported by the $13 billion MIT endowment, which is surely generating money through many of the practices disparaged both in this article and Chomsky's own beliefs.
- Mikeb85 11y ago
  So does that mean no one's allowed to criticize their employer? Or to encourage them to do better? Besides, I doubt his pension is much more (if any) than is typical in his profession...
  - lr4444lr 11y ago
    That's my point: I hear him criticizing the military industrial complex, but I haven't heard of him penning a letter to the MIT Board of Trustees, soliciting the support of current and emeritus faculty to join him as the undersigned, to divest from Northrop Grumman, Lockheed Martin, and the like. If I've missed it, do point me to it and I'll recant.
    - avar 11y ago
      I don't think he's done that, but what possible use would that be even if it work? Talk about raging against the smallest possible cog in the machine. He objects to the present practices of the US military industrial complex, if he managed to make MIT not take their money someone else would and nothing would change. Trying to do this via MIT's budget would be a pointless distraction to achieving his stated goals.
    - Mikeb85 11y ago
      Fair enough. Noam Chomsky says a lot of things, I would have figured he'd have criticized his employer at least a few times. A quick search finds he has criticized universities for various things...
- 11y ago
cpr 11y ago
Funny, I thought I read the Harvard endowment people invented hedge funds, a long time back, in order to maximize results. (My alma mater, so I may have read that years ago in one of their publications.)
hackuser 11y ago
I generally don't support endowments. The ROI seems very poor: Only interest on the investment will be used for the cause you are supporting, and it will be for undetermined purposes in perpetuity. Also, a permanent source of funding could be a very serious problem, creating a disincentive to change. If you were investing for personal profit rather than to support a cause, would you even consider an investment that offered those terms? Even fixed rate investments return your principal eventually.
- hkmurakami 11y ago
  Yes I would take the Yale endowment's 20 year risk adjusted returns in a heartbeat.
KKKKkkkk1 11y ago
The problem is that an Ivy League school is paying the expenses of managing investments worth a gazillion dollars instead of focusing on research and education. Money management is not what the universities are good at, and it's not what they are for. But in fact, the "hedge fund problem" is not the only problem American universities have - they are also running sports teams, housing, construction and real estate operations and whatnot. It's as if the purpose for which they were created has become an afterthought.
- ykl 11y ago
  Not to mention vast hospital networks~ in a number of cities, universities run major or even the primary hospital network in the city.
  - jsjohnst 11y ago
    How do you suppose that med students get the required on the job training (aka residency) otherwise? Teaching hospitals are a very necessary thing in the medical field.
    - ykl 11y ago
      I didn't say universities shouldn't have hospitals. I was just pointing out that it's another field that universities are highly involved/invested in.
- pdeuchler 11y ago
  You have this entirely backwards. Sports team management, housing, construction, and especially investment operations are exactly what today's schools are good at! The pesky problem that keeps popping up is those darned students and their education...
- deleted 11y ago
  [deleted]
- vzcx 11y ago
  > Money management is not what the universities are good at, and it's not what they are for. Isn't that precisely why they pay other people to manage it? > It's as if the purpose for which they were created has become an afterthought. I sometimes wonder what that purpose is. What do you think?
rayiner 11y ago
> Yale’s comparatively modest $26 billion endowment, for example, made hedge fund managers $480 million in 2014, while only $170 million was spent on things like tuition assistance and fellowships for students. For context, Yale's endowment produced an investment gain of $4 billion that year. Seems like the $480 million was money well spent.
- SilasX 11y ago
  Is that investment gain net of the fund manager payment? Because an S&P 500 index fund would have returned 13.5% that year[1], or ~$3.5 billion, about the same as $4 billion minus the half-billion hedge fund managers costs. And presumably they had to pay other investment managers (for non-hedge investments), and the money in HFs is significantly less liquid and accessible and more volatile. [1] http://performance.morningstar.com/fund/performance-return.action?t=VFINX http://performance.morningstar.com/fund/performance-return.a...
  - beeboop 11y ago
    This is ignoring a lot that goes into investment management. It's easy to say S&P would have done just as well on that particular year, but what about every other year? What about years with big losses? Additionally, investment managers do things like create portfolios for you that match your risk tolerance or other special needs/requirements. Overall, it's true that managed investments don't do as well as index funds, but it's ignoring a lot of the risk management that goes into being actively managed.
    - SilasX 11y ago
      Being able to find where you are on the risk/return and growth/income spectrums is not hard enough to merit the hundreds of millions of dollars in fees. For whatever strategy you want, find the corresponding index fund with that strategy, and it will probably have done better after expenses and will have more liquidity and less volatility.
      - 11y ago
epalmer 11y ago
The University of Richmond has the Spider Management Company managing it and other smaller endowments. Richmond has done well with its endowment. http://smc.richmond.edu/ http://smc.richmond.edu/ As of 2015 its endowment was valued at $2.37 Billion. That with ~4,100 Full Time Equivalent (FTE) students.
andr3w321 11y ago
I don't really care if universities hire hedge managers to manage their endowment, but it's absurd that schools with multibillion dollar endowments still charge tuition. Yale has ~12,000 students and a $26 billion endowment. Tuition is ~$45,000 per student. $45,000 * 12,000 = $540 million. They can't spend 2%(540/26,000) of their endowment per year on free tuition? What is this money for? Of course this ignores financial aid so Yale's operating costs are much less than $500 mil/year. If you're going to donate to a university your money will go much further at a small college that actually needs your money and will actually spend it rather than hoarding it. TMQ had some great articles about this topic back in the day. http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert-griffin-iii-blaine-gabbert-why-mega-trades-work-nfl-tuesday-morning-quarterback http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert... Halfway down.
- jonknee 11y ago
  > I don't really care if universities hire hedge managers to manage their endowment, but it's absurd that schools with multibillion dollar endowments still charge tuition. Yale has ~12,000 students and a $26 billion endowment. Tuition is ~$45,000 per student. $45,000 * 12,000 = $540 million. They can't spend 2%(540/26,000) of their endowment per year on free tuition? What is this money for? It's mainly a tax on rich people. Students from lower income households don't pay that tuition.
  - jqgatsby 11y ago
    I walked out of MIT with $100K in student loans, because I had the combination of 'parents who make too much money' and 'parents who had five kids and did not adequately save for their children's education'. I'm all for soaking the rich, but how is that fair? I was apparently rich by association, and it was pretty upsetting to see kids who were ostensibly poorer than I was get a substantially easier start in life.
    - jonknee 11y ago
      > I'm all for soaking the rich, but how is that fair? I was apparently rich by association, and it was pretty upsetting to see kids who were ostensibly poorer than I was get a substantially easier start in life. A private school deciding to charge for its valuable stamp of approbal has nothing to do with it being a fair price.
huac 11y ago
A bit tangential, but don't donate to Ivy Leagues. I get that you might feel a sense of pride in having graduated from the school, but with a 11 digit endowment, you can rest assured that the school will be there for future students in perpetuity. Rather, give to state schools or community colleges or really, any other school. Help them serve students of all economic backgrounds, not just the elite. The most important consideration for spending money is generally its marginal benefit (obviously equal amounts are worth more to poorer institutions) but we could also think about this in terms of marginal students - how many more students can attend/graduate with less debt because of our donation?
- spectre256 11y ago
  But then you don't get invited to Ivy League donor parties
  - JetSpiegel 11y ago
    In which you can make more money to donate to the fund. It's turtles all the way down
- nostromo 11y ago
  I agree with you, but many people see that as a plus when donating. If I give $x to an organization that desperately needs it, it will be spent immediately. If I give $x to an endowment, it will sit there in perpetuity, providing investment income to the organization for decades or centuries. Ben Franklin understood this and left a small amount of money (1,000 pounds) to the cities of Boston and Philadelphia in his will, instructing that the funds not be used for 200 years. http://eddiethompson.org/2012/09/30/franklin_endowment/ http://eddiethompson.org/2012/09/30/franklin_endowment/
  - Cacti 11y ago
    Not to be flippant, but, it's a good thing Ben Franklin wasn't born in Zimbabwe!
Pyxl101 11y ago
The article title "...with Schools Attached" misses an important fact about most universities. The purpose of most universities is to engage in scientific research. They are not schools, not primarily. They are chiefly research institutions that, yes, have schools attached. For more about this, read: http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/the-purpose-of-harvard-is-not-to-educate-people/ http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/... > [T]here is one misimpression that people seem to have, that might as well be corrected before any hasty actions are taken: the purpose of Harvard is not to educate students. If anything, its primary purpose is to produce research and scholarly work. Nobody should be surprised that the gigantic endowment isn’t put to use in providing top-flight educational experiences for a much larger pool of students; it could be, for sure, but that’s not the goal. The endowment is there to help build new facilities, launch new research initiatives, and attract the best faculty. [...] > Don’t believe me? Here is the test: when was the last time Harvard made a senior tenure offer to someone because they were a world-class educator, rather than a world-class researcher? Not only is the answer “never,” the question itself is somewhat laughable. > This is not a value judgment, nor is it a particular complaint about Harvard. It’s true of any top-ranked private research university, including Caltech. (Note that Caltech has over 1200 faculty members and fewer than 900 undergraduate students.) And it is not a statement about universities in general; many large public universities, and smaller liberal-arts schools, take education very seriously as a primary mission. This is by no means incompatible with being a top-notch research institution — the physics departments at places like Berkeley or UC Santa Barbara would be the envy of almost any private research university. But those places also take their educational mission very seriously, which Harvard, honestly, does not.
- timrpeterson 11y ago
  Except, they treat their researchers like total crap. Taking 2/3 of all grant money for overhead? Salaries for 45 year olds with 20 years of experience that are the same or worse as 25 year old with zero experience in private sector. Publish or perish? This whole thing you say these schools focus on, research? Pathetic. And trust me I know I've been at all the top schools and am now a professor.
  - 11y ago
Houshalter 11y ago
I don't see the issue with this. These are long term institutions. Many are centuries old. They should invest their money for the long term and survive off the interest. What's more remarkable is that people voluntarily donate money to them. Why would you do that? These institutions are not in need of cash by any means. And if you are going to be charitable, there are organizations where that money can do far more good, like the top Givewell charities.
jorgecurio 11y ago
> Combine all of the above with the recent stories about hedge fund managers being exploitative sociopaths— what the fuck. I mean come on but sociopaths thrown around like a cheap slut is too much. When you have to perform and you are getting paid to gamble and WIN, you are going to need insider information. You SIMPLY CANNOT WIN in the hedge fund game without insider. a hedge fund guy once told me everybody fucking does it. Pay some underpaid, underappreciated guy at the company in cash. He told me SEC does a fuck job and only goes after the guys that really stand out, the too big to let them get away. They only go after high profile guys and once they go to jail for white collar crime, they have extensive network they tap into for employment and working together. Yeah it's fucking scary what hedge fund managers are capable of but it's also overreaching to say all hedge fund managers are this corrupt, obviously ones that weren't smart enough to figure out how the game is really played.
chvid 11y ago
I hear the next big trade is shorting student debt. Maybe they should go for that.
Animats 11y ago
Stanford spun off its investment operation in 1991 as the "Stanford Management Company".[1] Their management has become more aggressive over the years; they've gone from 10% private equity to 25% private equity. Stanford is involved with VC pools that invest in startups. They own substantial parts of Google and Cisco. The Stanford Management Company also operates Stanford's substantial real estate holdings. Stanford owns about 12 square miles of Silicon Valley. [1] http://www.smc.stanford.edu/ http://www.smc.stanford.edu/
arca_vorago 11y ago
So I wonder exactly how much universities doing this lost when LIBOR was manipulated at the behest of the Bank of England because the Fed stupidly decided the rate they would use would be set in England of all places, essentially handing over monetary policy?
madad5 11y ago
I remember reading about rich US units back in 2011: http://www.theguardian.com/world/2011/jun/08/us-universities-africa-land-grab http://www.theguardian.com/world/2011/jun/08/us-universities... No surprise here. They've been built to do this for years, apparently.
swiley 11y ago
It's a shame more of it isn't going to financial aid. Maybe the universities would do better investing in student run research.
tsguo3 11y ago
Would like to offer an argument that the Ivy League schools that hire hedge funds also are very good at subsidizing tuition. When I went to Princeton, only 40% of students paid the full "45k" tuition, and those were families that were so well off that they don't mind the 45k at all. I would say the average tuition paid at Princeton is closer to 20k. So there does seem to be such a correlation: rich schools -> using HFs -> make a bunch of money -> fund students from poorer backgrounds to attend the school.

397 points by ShaneBonich 11y ago

teaman2000 11y ago

The issue is not so much that schools invest in hedge funds (the endowment managers are just trying to maximize returns), but that the endowments pay out such a small percentage of their funds each year to support research, financial aid, and everything else. Harvard pays out only 4-6% of the endowment yearly. On their huge endowment, if they increased the payout by .5%, they would have a whole lot more to spend on worthy activities instead of saving for the year 3000.

cheez 11y ago
History shows that world changing research and ideas are spread out over decades, if not centuries. By planning to be around in the year 3000, they're making sure that they can contribute.
CompelTechnic 11y ago
I think saving for perpetuity is a good idea. Lots of endowment money lives for centuries in these institutions, spitting off gains- it would be selfish of a particular generation to draw this fund down excessively. Considering long-term real rates of return on a diversified portfolio, a 4% annual withdrawal rate (the "4% rule") is advocated for most retirees- and they only have to make their nest egg last 30 years. What sort of signal would that give to charitable givers to the university when it decides to start taking 8% per year, and seeing the money exponentially decay? I'm in no position to donate a large amount to a university, but if I were I would imagine that I would like to see it live on, not wither on the vine.
bpodgursky 11y ago
This is incredibly shortsighted. The point of an endowment is not to pay it off, the point is that the endowment persists indefinitely, and the interest / returns fund operations. If people wanted to contribute directly to a university, they can. Instead they're contributing to the endowment. Respect that choice. It's pathetic that universities have actually set up a sustainable source for funding scholarships etc indefinitely -- where spending caps are actually restricted -- and the vultures immediately descend to suck it dry and spend it off. And then in a few decades when it's gone: ???
- toomuchtodo 11y ago
  What if university endowments were used to fund research and implementation into ways to drive down the cost of education to zero?
  - Zigurd 11y ago
    Like edX?
  - c0g 11y ago
    Because whatever the idea is, it probably won't work and then there wont be free education or any money.
    - toomuchtodo 11y ago
      I find your comment ironic on a forum sponsored by an entity that funds "creative destruction" of existing market spaces.
  - aroberge 11y ago
    Endowment funds are accrued through donations. The vast majority of donors would have no interest in giving money towards operational costs; they are interested in something that can be seen as a legacy.
  - leakybit 11y ago
    The internet has already driven the cost of education to zero, what schools are really selling are degrees. Anyways, Yale only spends $170 million on tuition assistance, but in reality ; Yale covers full tuition and housing costs for students who's family income is less than $200,000.
    - wallacoloo 11y ago
      > The internet has already driven the cost of education to zero [...] For things like CS, sure - mostly. Excepting for slightly niche areas like embedded programming, you can achieve similar experience for $0. But for most other [engineering] degrees, this isn't true. You can't tape out a custom integrated circuit (IC) for free, but this is something some EE undergrads get to do at brand-name universities. Even the licensing cost of the software used to design those ICs can reach six figures. I imagine there are similar things with chemistry, material science students and especially medical students. But yeah, even in those other engineering fields, the internet has reduced the cost of education.
thefastlane 11y ago
> "the endowment managers are just trying to maximize returns" respectfully, the article paints a much darker and more insidious picture than that.
- blakesterz 11y ago
  It seems to paint the picture that they're trying maximize the money they (the managers) make, not necessarily the returns.
  - deleted 11y ago
    [deleted]
deleted 11y ago
[deleted]
hkmurakami 11y ago
Harvard's history is longer than that of the United States. Planning for year 3000 seems perfectly prudent, and honestly, responsible behavior.
nicobn 11y ago
4%-6% is almost certainly sustainable. Higher pay outs expose Harvard to wealth dilapidation. Companies, institutions and even empires come and go. The most successful adhere to conservative governance and plan for the next century, not the next semester. Harvard was founded in 1636. So far, it has survived 380 years. That's pretty impressive.
johnloeber 11y ago
You are now encountering the concept of a safe withdrawal rate. If you have money and want to spend it effectively, the best course of action is not to immediately spend it all, but to invest it. Then, once a year, you'll want to take the profits, reinvest a sufficient amount such that your capital doesn't depreciate due to inflation, and then to spend the rest. A more conservative strategy would have you reinvesting even more. What's the point? Well, suppose you have $100. You could spend it all now. Or you could invest at a 7% profit rate, reinvest 2% for inflation, and then spend the remaining 5%. This lets you spend $5 a year, inflation-adjusted, for the foreseeable future -- so if your timeframe is longer than twenty years (20x5 = 100), it makes sense. That's not to mention that having a lot of money in investments gives a school substantial practical/political power.
- 77pt77 11y ago
  > Or you could invest at a 7% profit rate Tips welcome.
  - jldugger 11y ago
    Broad market indicies like S&P500 are regarded as having a 7 percent return after adjusting for inflation.
    - 77pt77 11y ago
      According to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... from 2006-2015 the SP500 had a geometric yearly mean return of 7.25%. according to http://www.usinflationcalculator.com/inflation/current-inflation-rates/ http://www.usinflationcalculator.com/inflation/current-infla... The average inflation for that period is 1.9% so you get roughly 5%. Still pretty decent.
      - jldugger 11y ago
        We're talking longer than 10 years here. A better estimate might calculate the average 10 year return for every 10 year return period, and the standard deviation of that same data set. And then do that calculation for 30 years. I believe you end up with a higher average and smaller deviation at 30 than 10.

inthewoods 11y ago

I've been waiting for this article to surface on HN. The other problem here is that hedge funds, as an investment vehicle, really haven't done that well. So it is essentially a transfer of donations to the hedge fund industry while the endowment could have done better avoiding them altogether. Obviously there are some hedge funds that have done well - but on the whole they are expensive and do not add alpha. Back in the day, Harvard didn't outsource to hedge funds but instead had the portfolio managers in-house. These folks were paid a small fraction of what they would make in the private hedge fund industry, but my understanding is that the Harvard community was up in arms at what they were making - so they quit/got pushed out and then Harvard started outsourcing to hedge funds. The result was worse performance and higher fees. Of course, it's not all roses - Larry Summers famously made a terrible bet on interest rates that Harvard had to unwind at a large loss.

digikata 11y ago
Is the outsourcing somewhat recent? I've been reading through the actual text in the Piketty book and he discusses the relative advantages of large university endowments vs smaller ones. He has a data table in it for 1980-2010 where the returns seem pretty reasonable (but much higher for larger account balances of Harvard-Yale-Princeton). http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf http://piketty.pse.ens.fr/files/capital21c/en/pdf/T12.2.pdf People can argue about his book's overall points, but few can argue that he's accumulated a lot of interesting data. I've been trying to reconcile that data with the Buffet view of complex hedge funds not beating straight index funds for gain... and by some other data Buffet is correct.. but the risk profiles may differ (Though it often feels like "risk" is the financial industry equivalent of engineering fudge factors).
- inthewoods 11y ago
  That's a great question - when I was in the industry (back in 2005-2006) Harvard had already outsourced a large portion after their managers left. In many cases, the managers started up their own funds and then Harvard immediately placed money into them. I think the answer may be that Harvard (and others) continue to see decent returns - the question is at what cost relative to managing it internally.

mishchea 11y ago

Is it just me or does the article fail to mention/estimate/discuss how much money the universities received _from_ hedge funds? It repeats over and over again how much the schools _paid_ in managers' fees, but if the return was several times that amount, then I guess I don't see the problem.

SilasX 11y ago
If they did show that data, it would look worse. On average, universities don't outperform (far lower-cost) index funds with similar objectives, per the recent HN story: https://news.ycombinator.com/item?id=11202349 https://news.ycombinator.com/item?id=11202349
- mishchea 11y ago
  The article focuses on universities' investments in hedge funds specifically. The numbers in the article suggest that on the high end, about 10–20% of an endowment will be in a hedge fund. The question I have is, what are the typical returns just on that 10–20% investment? The endowment can do poorly (as bad as or worse than an index fund) as a whole, even if the investment into hedge funds is paying out well.
- hkmurakami 11y ago
  Any discussions of returns must necessarily consider the risk incurred to achieve that return.
  - SilasX 11y ago
    Sure, but (by most metrics) hedge funds are going to be riskier/more volatile and you have to lock up your money for longer. So the same return would count as worse performance if placed in hedge fund (and that's not even accounting for differences in expenses yet).
    - beeboop 11y ago
      Hedge funds as a group are only risky and volatile compared to mutual funds. Their degree of riskiness varies tremendously, and there are a great number of them that would offering investment management that is tremendously less risky than an index fund.

jfoutz 11y ago

Reminds me of this charming but probably fake story about Oxford New college http://www.atlasobscura.com/places/oak-beams-new-college-oxford http://www.atlasobscura.com/places/oak-beams-new-college-oxf... On the other hand, the modern version, embracing risk and avoiding ethical standards probably won't yield the thousand year endowment they're looking for.

bhewes 11y ago

I don't know how much this matters. Harvard has the richest endowment but still has less money then nine individuals. I am just waiting for say the Carlyle Group to go public like KKR or Blackstone to make HH funds boring and mainstream.

LAMike 11y ago
How would that make HH's less boring?
narrowrail 11y ago
You are in luck, "In 2012, Carlyle completed a $700 million initial public offering and began trading on the NASDAQ stock exchange on May 3, 2012." https://en.wikipedia.org/wiki/The_Carlyle_Group https://en.wikipedia.org/wiki/The_Carlyle_Group
- maxxxxx 11y ago
  I didn't know they were public. Looking at the stock chart they don't exactly kick ass.
  - jessaustin 11y ago
    From my limited exposure to them, they hadn't for some time before the IPO either. The fact that they considered an IPO was probably a bad sign.
- bhewes 11y ago
  Ha, that is what I get for not paying attention over the past four years.

lr4444lr 11y ago

Sidenote, and I may get down-voted heavily for saying this, because he's got plenty of "cred" on so many different fronts, but Noam Chomsky always struck me as a hypocrite when it came to his economic and political thinking for taking a pension supported by the $13 billion MIT endowment, which is surely generating money through many of the practices disparaged both in this article and Chomsky's own beliefs.

Mikeb85 11y ago
So does that mean no one's allowed to criticize their employer? Or to encourage them to do better? Besides, I doubt his pension is much more (if any) than is typical in his profession...
- lr4444lr 11y ago
  That's my point: I hear him criticizing the military industrial complex, but I haven't heard of him penning a letter to the MIT Board of Trustees, soliciting the support of current and emeritus faculty to join him as the undersigned, to divest from Northrop Grumman, Lockheed Martin, and the like. If I've missed it, do point me to it and I'll recant.
  - avar 11y ago
    I don't think he's done that, but what possible use would that be even if it work? Talk about raging against the smallest possible cog in the machine. He objects to the present practices of the US military industrial complex, if he managed to make MIT not take their money someone else would and nothing would change. Trying to do this via MIT's budget would be a pointless distraction to achieving his stated goals.
  - Mikeb85 11y ago
    Fair enough. Noam Chomsky says a lot of things, I would have figured he'd have criticized his employer at least a few times. A quick search finds he has criticized universities for various things...
11y ago

cpr 11y ago

Funny, I thought I read the Harvard endowment people invented hedge funds, a long time back, in order to maximize results. (My alma mater, so I may have read that years ago in one of their publications.)

hackuser 11y ago

I generally don't support endowments. The ROI seems very poor: Only interest on the investment will be used for the cause you are supporting, and it will be for undetermined purposes in perpetuity. Also, a permanent source of funding could be a very serious problem, creating a disincentive to change. If you were investing for personal profit rather than to support a cause, would you even consider an investment that offered those terms? Even fixed rate investments return your principal eventually.

hkmurakami 11y ago
Yes I would take the Yale endowment's 20 year risk adjusted returns in a heartbeat.

KKKKkkkk1 11y ago

The problem is that an Ivy League school is paying the expenses of managing investments worth a gazillion dollars instead of focusing on research and education. Money management is not what the universities are good at, and it's not what they are for. But in fact, the "hedge fund problem" is not the only problem American universities have - they are also running sports teams, housing, construction and real estate operations and whatnot. It's as if the purpose for which they were created has become an afterthought.

ykl 11y ago
Not to mention vast hospital networks~ in a number of cities, universities run major or even the primary hospital network in the city.
- jsjohnst 11y ago
  How do you suppose that med students get the required on the job training (aka residency) otherwise? Teaching hospitals are a very necessary thing in the medical field.
  - ykl 11y ago
    I didn't say universities shouldn't have hospitals. I was just pointing out that it's another field that universities are highly involved/invested in.
pdeuchler 11y ago
You have this entirely backwards. Sports team management, housing, construction, and especially investment operations are exactly what today's schools are good at! The pesky problem that keeps popping up is those darned students and their education...
deleted 11y ago
[deleted]
vzcx 11y ago
> Money management is not what the universities are good at, and it's not what they are for. Isn't that precisely why they pay other people to manage it? > It's as if the purpose for which they were created has become an afterthought. I sometimes wonder what that purpose is. What do you think?

rayiner 11y ago

> Yale’s comparatively modest $26 billion endowment, for example, made hedge fund managers $480 million in 2014, while only $170 million was spent on things like tuition assistance and fellowships for students. For context, Yale's endowment produced an investment gain of $4 billion that year. Seems like the $480 million was money well spent.

SilasX 11y ago
Is that investment gain net of the fund manager payment? Because an S&P 500 index fund would have returned 13.5% that year[1], or ~$3.5 billion, about the same as $4 billion minus the half-billion hedge fund managers costs. And presumably they had to pay other investment managers (for non-hedge investments), and the money in HFs is significantly less liquid and accessible and more volatile. [1] http://performance.morningstar.com/fund/performance-return.action?t=VFINX http://performance.morningstar.com/fund/performance-return.a...
- beeboop 11y ago
  This is ignoring a lot that goes into investment management. It's easy to say S&P would have done just as well on that particular year, but what about every other year? What about years with big losses? Additionally, investment managers do things like create portfolios for you that match your risk tolerance or other special needs/requirements. Overall, it's true that managed investments don't do as well as index funds, but it's ignoring a lot of the risk management that goes into being actively managed.
  - SilasX 11y ago
    Being able to find where you are on the risk/return and growth/income spectrums is not hard enough to merit the hundreds of millions of dollars in fees. For whatever strategy you want, find the corresponding index fund with that strategy, and it will probably have done better after expenses and will have more liquidity and less volatility.
    - 11y ago

epalmer 11y ago

The University of Richmond has the Spider Management Company managing it and other smaller endowments. Richmond has done well with its endowment. http://smc.richmond.edu/ http://smc.richmond.edu/ As of 2015 its endowment was valued at $2.37 Billion. That with ~4,100 Full Time Equivalent (FTE) students.

andr3w321 11y ago

I don't really care if universities hire hedge managers to manage their endowment, but it's absurd that schools with multibillion dollar endowments still charge tuition. Yale has ~12,000 students and a $26 billion endowment. Tuition is ~$45,000 per student. $45,000 * 12,000 = $540 million. They can't spend 2%(540/26,000) of their endowment per year on free tuition? What is this money for? Of course this ignores financial aid so Yale's operating costs are much less than $500 mil/year. If you're going to donate to a university your money will go much further at a small college that actually needs your money and will actually spend it rather than hoarding it. TMQ had some great articles about this topic back in the day. http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert-griffin-iii-blaine-gabbert-why-mega-trades-work-nfl-tuesday-morning-quarterback http://espn.go.com/nfl/story/_/page/TMQWeekFour140930/robert... Halfway down.

jonknee 11y ago
> I don't really care if universities hire hedge managers to manage their endowment, but it's absurd that schools with multibillion dollar endowments still charge tuition. Yale has ~12,000 students and a $26 billion endowment. Tuition is ~$45,000 per student. $45,000 * 12,000 = $540 million. They can't spend 2%(540/26,000) of their endowment per year on free tuition? What is this money for? It's mainly a tax on rich people. Students from lower income households don't pay that tuition.
- jqgatsby 11y ago
  I walked out of MIT with $100K in student loans, because I had the combination of 'parents who make too much money' and 'parents who had five kids and did not adequately save for their children's education'. I'm all for soaking the rich, but how is that fair? I was apparently rich by association, and it was pretty upsetting to see kids who were ostensibly poorer than I was get a substantially easier start in life.
  - jonknee 11y ago
    > I'm all for soaking the rich, but how is that fair? I was apparently rich by association, and it was pretty upsetting to see kids who were ostensibly poorer than I was get a substantially easier start in life. A private school deciding to charge for its valuable stamp of approbal has nothing to do with it being a fair price.

huac 11y ago

A bit tangential, but don't donate to Ivy Leagues. I get that you might feel a sense of pride in having graduated from the school, but with a 11 digit endowment, you can rest assured that the school will be there for future students in perpetuity. Rather, give to state schools or community colleges or really, any other school. Help them serve students of all economic backgrounds, not just the elite. The most important consideration for spending money is generally its marginal benefit (obviously equal amounts are worth more to poorer institutions) but we could also think about this in terms of marginal students - how many more students can attend/graduate with less debt because of our donation?

spectre256 11y ago
But then you don't get invited to Ivy League donor parties
- JetSpiegel 11y ago
  In which you can make more money to donate to the fund. It's turtles all the way down
nostromo 11y ago
I agree with you, but many people see that as a plus when donating. If I give $x to an organization that desperately needs it, it will be spent immediately. If I give $x to an endowment, it will sit there in perpetuity, providing investment income to the organization for decades or centuries. Ben Franklin understood this and left a small amount of money (1,000 pounds) to the cities of Boston and Philadelphia in his will, instructing that the funds not be used for 200 years. http://eddiethompson.org/2012/09/30/franklin_endowment/ http://eddiethompson.org/2012/09/30/franklin_endowment/
- Cacti 11y ago
  Not to be flippant, but, it's a good thing Ben Franklin wasn't born in Zimbabwe!

Pyxl101 11y ago

The article title "...with Schools Attached" misses an important fact about most universities. The purpose of most universities is to engage in scientific research. They are not schools, not primarily. They are chiefly research institutions that, yes, have schools attached. For more about this, read: http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/the-purpose-of-harvard-is-not-to-educate-people/ http://blogs.discovermagazine.com/cosmicvariance/2008/05/29/... > [T]here is one misimpression that people seem to have, that might as well be corrected before any hasty actions are taken: the purpose of Harvard is not to educate students. If anything, its primary purpose is to produce research and scholarly work. Nobody should be surprised that the gigantic endowment isn’t put to use in providing top-flight educational experiences for a much larger pool of students; it could be, for sure, but that’s not the goal. The endowment is there to help build new facilities, launch new research initiatives, and attract the best faculty. [...] > Don’t believe me? Here is the test: when was the last time Harvard made a senior tenure offer to someone because they were a world-class educator, rather than a world-class researcher? Not only is the answer “never,” the question itself is somewhat laughable. > This is not a value judgment, nor is it a particular complaint about Harvard. It’s true of any top-ranked private research university, including Caltech. (Note that Caltech has over 1200 faculty members and fewer than 900 undergraduate students.) And it is not a statement about universities in general; many large public universities, and smaller liberal-arts schools, take education very seriously as a primary mission. This is by no means incompatible with being a top-notch research institution — the physics departments at places like Berkeley or UC Santa Barbara would be the envy of almost any private research university. But those places also take their educational mission very seriously, which Harvard, honestly, does not.

timrpeterson 11y ago
Except, they treat their researchers like total crap. Taking 2/3 of all grant money for overhead? Salaries for 45 year olds with 20 years of experience that are the same or worse as 25 year old with zero experience in private sector. Publish or perish? This whole thing you say these schools focus on, research? Pathetic. And trust me I know I've been at all the top schools and am now a professor.
- 11y ago

Houshalter 11y ago

I don't see the issue with this. These are long term institutions. Many are centuries old. They should invest their money for the long term and survive off the interest. What's more remarkable is that people voluntarily donate money to them. Why would you do that? These institutions are not in need of cash by any means. And if you are going to be charitable, there are organizations where that money can do far more good, like the top Givewell charities.

jorgecurio 11y ago

> Combine all of the above with the recent stories about hedge fund managers being exploitative sociopaths— what the fuck. I mean come on but sociopaths thrown around like a cheap slut is too much. When you have to perform and you are getting paid to gamble and WIN, you are going to need insider information. You SIMPLY CANNOT WIN in the hedge fund game without insider. a hedge fund guy once told me everybody fucking does it. Pay some underpaid, underappreciated guy at the company in cash. He told me SEC does a fuck job and only goes after the guys that really stand out, the too big to let them get away. They only go after high profile guys and once they go to jail for white collar crime, they have extensive network they tap into for employment and working together. Yeah it's fucking scary what hedge fund managers are capable of but it's also overreaching to say all hedge fund managers are this corrupt, obviously ones that weren't smart enough to figure out how the game is really played.

chvid 11y ago

I hear the next big trade is shorting student debt. Maybe they should go for that.

Animats 11y ago

Stanford spun off its investment operation in 1991 as the "Stanford Management Company".[1] Their management has become more aggressive over the years; they've gone from 10% private equity to 25% private equity. Stanford is involved with VC pools that invest in startups. They own substantial parts of Google and Cisco. The Stanford Management Company also operates Stanford's substantial real estate holdings. Stanford owns about 12 square miles of Silicon Valley. [1] http://www.smc.stanford.edu/ http://www.smc.stanford.edu/

arca_vorago 11y ago

So I wonder exactly how much universities doing this lost when LIBOR was manipulated at the behest of the Bank of England because the Fed stupidly decided the rate they would use would be set in England of all places, essentially handing over monetary policy?

madad5 11y ago

I remember reading about rich US units back in 2011: http://www.theguardian.com/world/2011/jun/08/us-universities-africa-land-grab http://www.theguardian.com/world/2011/jun/08/us-universities... No surprise here. They've been built to do this for years, apparently.

swiley 11y ago

It's a shame more of it isn't going to financial aid. Maybe the universities would do better investing in student run research.

tsguo3 11y ago

Would like to offer an argument that the Ivy League schools that hire hedge funds also are very good at subsidizing tuition. When I went to Princeton, only 40% of students paid the full "45k" tuition, and those were families that were so well off that they don't mind the 45k at all. I would say the average tuition paid at Princeton is closer to 20k. So there does seem to be such a correlation: rich schools -> using HFs -> make a bunch of money -> fund students from poorer backgrounds to attend the school.