4 ms·

And this is despite the fact that on average, experts can't beat a monkey with a dartboard when it comes to picking stocks. Every study has shown this to be tru

by neilc 16y ago

And this is despite the fact that on average, experts can't beat a monkey with a dartboard when it comes to picking stocks. Every study has shown this to be true. If that is true (and I've certainly heard it repeated often enough), then why is the Harvard endowment managed by a private group of experts? Similarly for just about every large endowment, pension fund, and similar pool of money. If those experts aren't able to either offer improved returns or reduced risk vs. random stock selection (or buying an index fund etc.), then I suspect that the boards of these large institutions wouldn't be paying the money managers' fees.

CamperBob 16y ago
My understanding is that the Harvard endowment is about the worst example you could've picked, unless there's a sarcastic subtext to your post that I'm overlooking.
- neilc 16y ago
  If you mean the recent losses, then that is not the point: the boards must have a reason for hiring highly-paid money managers. Besides, the long-term returns for the Harvard/Yale/etc. endowments are very impressive, and the rumour is that they've made up much of their recent losses in the past year.
  - CamperBob 16y ago
    ...and the rumour is that they've made up much of their recent losses in the past year So have I, but you darned sure don't want me running any trusts at Harvard. :)
slapshot 16y ago
I'll assume you're being serious: 1 - Because Harvard invests in lots of things that aren't liquid and well-traded. It's hard to guess the next direction of the U.S. stock market in part because the market is very liquid and there is a lot of volume. But Harvard also invests in things like timber lands (low deal flow), private equity (low liquidity), and other things that are very hard to price. These investments aren't available to you and I unless you happen to have $50 million laying around. 2 - Because when you have $40 billion to invest, very small differences in return make a massive different in dollars. If you're investing $40,000 then the last few pennies don't matter; if you're investing $40 billion those "pennies" are scholarships for 10 more kids. 3 - Because, as the the article implies, financial planning gets a lot more complicated when you have a different time horizon than "sometime in the future." A school like Harvard has spending needs every year and can't ride out a downturn the same way that a young kid saving for retirement can. On the other side, Harvard also hopes to last forever, and can make investments that won't pay off for 50 years. Time planning gets a lot more complicated. 4 - Taxes.
- neilc 16y ago
  Thanks! Interesting answer. With respect to (1), wouldn't a mutual fund have access to the same sorts of low liquidity opportunities? That seems like a possible reason to prefer a managed fund over an index fund, despite the higher fees.
  - anamax 16y ago
    > wouldn't a mutual fund have access to the same sorts of low liquidity opportunities? It depends on the fund's rules and mutual fund regulations. Also, non-liquid assets make it hard to maintain the target allocation when the fund is attracting lots of new money or folks are bailing.
    - neilc 16y ago
      Fair enough -- presumably both of those are simplified if you s/mutual fund/hedge fund/.
      - anamax 16y ago
        > presumably both of those are simplified if you s/mutual fund/hedge fund/. Possibly. I don't know the rules for hedge funds, the rules specific to other vehicles that are open to non-accredited investors, or the rules that apply to all such vehicles.
barrkel 16y ago
"The total value of Harvard’s endowment fell nearly 30 percent in the fiscal year ended June 30, 2009"
- michaelcampbell 16y ago
  I wonder how the dart-throwing monkeys did in that same time span... =)
  - chrisa 16y ago
    Assuming a dart-throwing monkey does about as well as the S&P, then nearly -30% as well: http://www.google.com/finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1246392000000&chddm=99314&chls=IntervalBasedLine&q=INDEXSP:.INX&ntsp=0 http://www.google.com/finance?chdnp=0&chdd=1&chds=1&...
    - mistermann 16y ago
      Monkeys however wouldn't be paid $26 million per year to do their job. :)
asmithmd1 16y ago
I think the Harvard Trustees are asking themselves the same question -- they recently released salary info for the top managers. Harvard paid the top 5 managers $26 million per year as they oversaw the endowment drop 22% http://www.upi.com/Top_News/US/2010/05/18/Harvard-releases-pay-information/UPI-81761274235577/ http://www.upi.com/Top_News/US/2010/05/18/Harvard-releases-p...

by neilc 16y ago

CamperBob 16y ago

My understanding is that the Harvard endowment is about the worst example you could've picked, unless there's a sarcastic subtext to your post that I'm overlooking.

neilc 16y ago
If you mean the recent losses, then that is not the point: the boards must have a reason for hiring highly-paid money managers. Besides, the long-term returns for the Harvard/Yale/etc. endowments are very impressive, and the rumour is that they've made up much of their recent losses in the past year.
- CamperBob 16y ago
  ...and the rumour is that they've made up much of their recent losses in the past year So have I, but you darned sure don't want me running any trusts at Harvard. :)

slapshot 16y ago

I'll assume you're being serious: 1 - Because Harvard invests in lots of things that aren't liquid and well-traded. It's hard to guess the next direction of the U.S. stock market in part because the market is very liquid and there is a lot of volume. But Harvard also invests in things like timber lands (low deal flow), private equity (low liquidity), and other things that are very hard to price. These investments aren't available to you and I unless you happen to have $50 million laying around. 2 - Because when you have $40 billion to invest, very small differences in return make a massive different in dollars. If you're investing $40,000 then the last few pennies don't matter; if you're investing $40 billion those "pennies" are scholarships for 10 more kids. 3 - Because, as the the article implies, financial planning gets a lot more complicated when you have a different time horizon than "sometime in the future." A school like Harvard has spending needs every year and can't ride out a downturn the same way that a young kid saving for retirement can. On the other side, Harvard also hopes to last forever, and can make investments that won't pay off for 50 years. Time planning gets a lot more complicated. 4 - Taxes.

neilc 16y ago
Thanks! Interesting answer. With respect to (1), wouldn't a mutual fund have access to the same sorts of low liquidity opportunities? That seems like a possible reason to prefer a managed fund over an index fund, despite the higher fees.
- anamax 16y ago
  > wouldn't a mutual fund have access to the same sorts of low liquidity opportunities? It depends on the fund's rules and mutual fund regulations. Also, non-liquid assets make it hard to maintain the target allocation when the fund is attracting lots of new money or folks are bailing.
  - neilc 16y ago
    Fair enough -- presumably both of those are simplified if you s/mutual fund/hedge fund/.
    - anamax 16y ago
      > presumably both of those are simplified if you s/mutual fund/hedge fund/. Possibly. I don't know the rules for hedge funds, the rules specific to other vehicles that are open to non-accredited investors, or the rules that apply to all such vehicles.

barrkel 16y ago

"The total value of Harvard’s endowment fell nearly 30 percent in the fiscal year ended June 30, 2009"

michaelcampbell 16y ago
I wonder how the dart-throwing monkeys did in that same time span... =)
- chrisa 16y ago
  Assuming a dart-throwing monkey does about as well as the S&P, then nearly -30% as well: http://www.google.com/finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1246392000000&chddm=99314&chls=IntervalBasedLine&q=INDEXSP:.INX&ntsp=0 http://www.google.com/finance?chdnp=0&chdd=1&chds=1&...
  - mistermann 16y ago
    Monkeys however wouldn't be paid $26 million per year to do their job. :)

asmithmd1 16y ago

I think the Harvard Trustees are asking themselves the same question -- they recently released salary info for the top managers. Harvard paid the top 5 managers $26 million per year as they oversaw the endowment drop 22% http://www.upi.com/Top_News/US/2010/05/18/Harvard-releases-pay-information/UPI-81761274235577/ http://www.upi.com/Top_News/US/2010/05/18/Harvard-releases-p...