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This just seems distasteful. A university should not be a business, because businesses will always default to whatever makes the most money. And sometimes, this

This just seems distasteful. A university should not be a business, because businesses will always default to whatever makes the most money. And sometimes, this is not the same as what is best for the students.

neilc 18y ago
What goal do you think the endowment folks should have followed, if not trying to make the most money (at an acceptable level of risk)?
sho 18y ago
I agree. What kind of "non-profit" organisation is paying its money managers $35m/yr to push its earnings to 20+%? That's not an educational endowment, that's a hedge fund, and an out-of-control one at that. Oh well, seems like they've learned their lesson now. Eleven billion lessons, in fact.
- neilc 18y ago
  That's not an educational endowment, that's a hedge fund Would you prefer if Harvard invested their endowment in a collection of outside hedge funds, the managers of which might easily be making $35m/yr? It's just a question of outsourcing vs. insourcing -- either way, Harvard wants to generate income from their endowment, and compensating the people with the skills to maximize endowment income is a perfectly rational thing to do. seems like they've learned their lesson now Not really; they just invested unwisely. The basic principle of trying to maximize endowment income via professional money managers is one that I'm sure Harvard would continue to embrace, as would any university with a large endowment, or any number of pension funds and non-profits with investment portfolios.
  - gojomo 18y ago
    they just invested unwisely From what I've read, it looks like the biggest problem was one of continuity: they fumbled transitions between managers. To some extent, this is the fault of the next level of management -- they should have understood the risk of the insourcing and transitions. I think it also falls on the outgoing manager(s) (Jack R. Meyer and Mohamed El-Erian) somewhat -- if you've been paid that much you have a residual duty to protect your exotic, aggressive bets from exploding early on the next watch. (Perhaps they gave guidance that was ignored; it might take lawsuits to know for sure.)
  - sho 18y ago
    I disagree. The point of a non-profit is not to seek to increase its net worth by aggresive market speculation. In fact, that seems like the very definition of for-profit! I am hardly an expert on such things but I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims, not as chips on a fund manager's gambling table. This is why people give to non-profits! Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. Otherwise they should stay out of aggresive wealth maximisation. It's not their money. And if it is their money, they should be taxed on their income like any other enterprise.
    - neilc 18y ago
      I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims Naturally -- what else do you think the endowment is for? Like any big university, Harvard takes endowment money, and invests it in such a way as to maximize returns. Some of those returns are reinvested in the endowment, and the rest are used to support the university. A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims. Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. You don't seem to understand the basic idea behind an endowment. If Harvard didn't earn a reasonable rate of interest on their endowment, they would quickly exhaust it at their current rate of spending. Simply "counteracting inflation" but not seeking a competitive return on their endowment would be grossly irresponsible, not to mention wasting a vast amount of capital that could be put to better use. As for the taxation question, I'm not sure how much tax Harvard has to pay. But they do have to comply with various legal requirements on how much money they pay out from their endowment each year vs. reinvesting it.
      - sho 18y ago
        "A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims." Well yes, but where do you draw the line? At what point does an endowment become a safe, constant feed from the ROI on donations from students past, and turn into a wealth fund for its own sake? In my opinion, by the time you are paying the university's money managers far, far in excess of what its own academics could ever hope to earn, you have crossed that line. I see parallels here between the Harvard example and, say, the Singapore Government's Temasek Holdings, noted for its aggresive investment strategies with public money. "You don't seem to understand the basic idea behind an endowment. " Sorry. I should have written "at replenishment rates" or similar. I wasn't thinking. "not seeking a competitive return on their endowment would be grossly irresponsible" Yeah well, who's irresponsible now? What do they say to someone who reached deep and gave a hundred K or so to express their thanks and hope to guarantee the university's future academic service? Oops, we just lost 80,000 times your donation through irresponsible speculation, can we have some more please? I understand your points, and can agree to some extent, but I can't help but think they went way too far. I must admit my thinking is probably shaped by coming from a country where universities are considered public institutions and these endowments are almost unheard-of, so my comments probably lack nuance in the American context. In fact, I find the whole thing vaguely obscene. Harvard sounds like a huge, voracious hedge fund with a small side business of maybe running a university with some of the profits. How can such a thing be? What is their charter? What if they bought up smaller universities and closed them down? Isn't that within their interest, too? Should we allow them this kind of power? Is it wise to allow academic institutions to focus on wealth creation first, actual education second? Does the success of failure of a university now come down to how well they manage their investments, not the quality of their tuition? I am reminded of some of my qualms with other non-profit groups. World Vision, for example, behaves in what I would say is a similar manner - the vast majority of donations they receive get ploughed straight into fundraising and advertising, in the hope of increasing the next round of donations. While this does make sense in a perverse, narrowly-focused way - they are only trying to get even more money for the children, after all! - the fact remains that their chief activity seems to be hiring ever more people and undertaking ever more overhead to increase their cashflow, and the starving children, etc, are merely the general theme of the never-ending story. I have a deep distrust of these institutions, especially non-profits, whose behavioural aims first and foremost appear to be self-perpetuation and endless growth, while their stated goals upon which their non-profit charter is hitched take a distant second place. Ah well, probably comes down to philosophical differences, like everything seems to. Not really trying to vastly increase the scope of the discussion, just thinking out loud.
  - mhb 18y ago
    Yale's endowment manager made $1.3M. http://www.nytimes.com/2007/02/18/business/yourmoney/18swensen.html?pagewanted=1 http://www.nytimes.com/2007/02/18/business/yourmoney/18swens...
- andylei 18y ago
  why should an educational endowment act any different than a hedge fund? hedge funds are designed to maximize return for some level of risk. if you think the level of risk they pursued was too high, that's another issue, but hedge funds aren't necessarily high risk
mkuhn 18y ago
Yes, it may seem so, but in my opinion Harvard did the right thing. They created a new separate entity which handled the business side. They created a new venture whose sole responsibility was to manage the Universities endowment. That this organisation wasn't controlled enough and didn't know where to stop is another story. I think that maximising the profits (within a risk scope) is in the interest of the students as long as it doesn't distract Harvard from being an excellent University, and I believe that wasn't the case.

neilc 18y ago

What goal do you think the endowment folks should have followed, if not trying to make the most money (at an acceptable level of risk)?

sho 18y ago

I agree. What kind of "non-profit" organisation is paying its money managers $35m/yr to push its earnings to 20+%? That's not an educational endowment, that's a hedge fund, and an out-of-control one at that. Oh well, seems like they've learned their lesson now. Eleven billion lessons, in fact.

neilc 18y ago
That's not an educational endowment, that's a hedge fund Would you prefer if Harvard invested their endowment in a collection of outside hedge funds, the managers of which might easily be making $35m/yr? It's just a question of outsourcing vs. insourcing -- either way, Harvard wants to generate income from their endowment, and compensating the people with the skills to maximize endowment income is a perfectly rational thing to do. seems like they've learned their lesson now Not really; they just invested unwisely. The basic principle of trying to maximize endowment income via professional money managers is one that I'm sure Harvard would continue to embrace, as would any university with a large endowment, or any number of pension funds and non-profits with investment portfolios.
- gojomo 18y ago
  they just invested unwisely From what I've read, it looks like the biggest problem was one of continuity: they fumbled transitions between managers. To some extent, this is the fault of the next level of management -- they should have understood the risk of the insourcing and transitions. I think it also falls on the outgoing manager(s) (Jack R. Meyer and Mohamed El-Erian) somewhat -- if you've been paid that much you have a residual duty to protect your exotic, aggressive bets from exploding early on the next watch. (Perhaps they gave guidance that was ignored; it might take lawsuits to know for sure.)
- sho 18y ago
  I disagree. The point of a non-profit is not to seek to increase its net worth by aggresive market speculation. In fact, that seems like the very definition of for-profit! I am hardly an expert on such things but I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims, not as chips on a fund manager's gambling table. This is why people give to non-profits! Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. Otherwise they should stay out of aggresive wealth maximisation. It's not their money. And if it is their money, they should be taxed on their income like any other enterprise.
  - neilc 18y ago
    I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims Naturally -- what else do you think the endowment is for? Like any big university, Harvard takes endowment money, and invests it in such a way as to maximize returns. Some of those returns are reinvested in the endowment, and the rest are used to support the university. A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims. Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. You don't seem to understand the basic idea behind an endowment. If Harvard didn't earn a reasonable rate of interest on their endowment, they would quickly exhaust it at their current rate of spending. Simply "counteracting inflation" but not seeking a competitive return on their endowment would be grossly irresponsible, not to mention wasting a vast amount of capital that could be put to better use. As for the taxation question, I'm not sure how much tax Harvard has to pay. But they do have to comply with various legal requirements on how much money they pay out from their endowment each year vs. reinvesting it.
    - sho 18y ago
      "A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims." Well yes, but where do you draw the line? At what point does an endowment become a safe, constant feed from the ROI on donations from students past, and turn into a wealth fund for its own sake? In my opinion, by the time you are paying the university's money managers far, far in excess of what its own academics could ever hope to earn, you have crossed that line. I see parallels here between the Harvard example and, say, the Singapore Government's Temasek Holdings, noted for its aggresive investment strategies with public money. "You don't seem to understand the basic idea behind an endowment. " Sorry. I should have written "at replenishment rates" or similar. I wasn't thinking. "not seeking a competitive return on their endowment would be grossly irresponsible" Yeah well, who's irresponsible now? What do they say to someone who reached deep and gave a hundred K or so to express their thanks and hope to guarantee the university's future academic service? Oops, we just lost 80,000 times your donation through irresponsible speculation, can we have some more please? I understand your points, and can agree to some extent, but I can't help but think they went way too far. I must admit my thinking is probably shaped by coming from a country where universities are considered public institutions and these endowments are almost unheard-of, so my comments probably lack nuance in the American context. In fact, I find the whole thing vaguely obscene. Harvard sounds like a huge, voracious hedge fund with a small side business of maybe running a university with some of the profits. How can such a thing be? What is their charter? What if they bought up smaller universities and closed them down? Isn't that within their interest, too? Should we allow them this kind of power? Is it wise to allow academic institutions to focus on wealth creation first, actual education second? Does the success of failure of a university now come down to how well they manage their investments, not the quality of their tuition? I am reminded of some of my qualms with other non-profit groups. World Vision, for example, behaves in what I would say is a similar manner - the vast majority of donations they receive get ploughed straight into fundraising and advertising, in the hope of increasing the next round of donations. While this does make sense in a perverse, narrowly-focused way - they are only trying to get even more money for the children, after all! - the fact remains that their chief activity seems to be hiring ever more people and undertaking ever more overhead to increase their cashflow, and the starving children, etc, are merely the general theme of the never-ending story. I have a deep distrust of these institutions, especially non-profits, whose behavioural aims first and foremost appear to be self-perpetuation and endless growth, while their stated goals upon which their non-profit charter is hitched take a distant second place. Ah well, probably comes down to philosophical differences, like everything seems to. Not really trying to vastly increase the scope of the discussion, just thinking out loud.
- mhb 18y ago
  Yale's endowment manager made $1.3M. http://www.nytimes.com/2007/02/18/business/yourmoney/18swensen.html?pagewanted=1 http://www.nytimes.com/2007/02/18/business/yourmoney/18swens...
andylei 18y ago
why should an educational endowment act any different than a hedge fund? hedge funds are designed to maximize return for some level of risk. if you think the level of risk they pursued was too high, that's another issue, but hedge funds aren't necessarily high risk

mkuhn 18y ago

Yes, it may seem so, but in my opinion Harvard did the right thing. They created a new separate entity which handled the business side. They created a new venture whose sole responsibility was to manage the Universities endowment. That this organisation wasn't controlled enough and didn't know where to stop is another story. I think that maximising the profits (within a risk scope) is in the interest of the students as long as it doesn't distract Harvard from being an excellent University, and I believe that wasn't the case.