4 ms·

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

by 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.

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.