Harvard: University or Hedgefund? Surprise!

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    So, if Hahvad stopped charging tuition to its students and still paid its professors how long would it take to run out of $?

    Maybe never.

    Well, unless you have an economic disaster. But when do those happen? Oh yeah, 2008.

    You knew the world’s most prestigious university was basically a hedge fund that has a school attached as an extracurricular activity, right? You think I’m exaggerating?

    You ever wonder why Larry Summers was the Dean?





    I think it is a real stretch to compare Harvard’s endowment to a hedge fund. While it might seem like a rich Ivy League school that’s sitting on a huge pile of gold, Harvard really has a very high “burn rate” in terms of all of the libraries, museums, hospitals, research laboratories, facilities, etc. that it has to support. Not to mention the physical plant of the central FAS campus itself and all of the other buildings and campuses spread out all over the place. Its greatest expense, as the article suggests, is labor. They must attract and retain the very best faculty and research fellows. Harvard students already get a ton of financial aid to defray the high cost of an education there. But even for those students paying full tuition, it probably only pays for around half of the actual cost of educating undergraduates there. I think there is some value in examining some of the questions posed by this piece. But most of this reads like a conservative hit piece on a bastion of American liberal arts education.



    I’m not sure what you’re saying. It’s a hit piece because it shows that the university spends many times more to compensate the managers of and maintain its endowment than it does its educators?

    I just find it interesting that risky hedge-funds are at the root of the university’s nest egg and they are tied to the same casino economics that nearly took us all down. I assumed they might be a little more conservative than that.

    And BTW, I’m a life-long progressive.




    And if you read this article, it outlines that they bloat the salaries of professors in an effort to reduce the visibility of their investment profits which might otherwise catch the eyes of potential tax-collectors – ie the state of MA.




    I like your style very much, wake!

    Please carry on.



    Well, thanks DBP. Back atcha’. I hope to have another cogent thought at some time in the near future. One never knows…



    Well, first I just don’t accept that what they’re presenting is true simply because they’re saying it is. Harvard is a private institution and I wonder how they sourced much of their information.

    The endowment isn’t a hedge fund. It is an entity that manages the University’s endowment. They don’t have an aggressive charter. Their goal is capital preservation and growth. Beyond that, comparing what they pay their money managers with what they pay their faculty is in itself a fallacious argument as it is an apples and oranges comparison. Two are mutually exclusive and are compensated commensurately with their respective industries (finance and higher education).

    The weakest part of this piece is the accusation that wealthy individuals are buying seats at Harvard for their kids. That is one of the oldest myths running. It might have been true in the 1960’s but it simply is not that common anymore.

    I’d much rather see criticism expended on the significant parts of the American educational system that are wholly deficient, as opposed to attacking the brightest part: an institution of higher learning that has been exceptional since the 17th century. To me it reads like low hanging populist fruit.



    I’ll start by revealing a potential bias in that I work in higher education and also for a private institution, albeit one not nearly as well endowed as Harvard. And I’m doing homework tonight (heh) so this’ll be quick, but let me just mention a few things:

    – the scale of increase of Harvard tuition over the time stated is commensurate with that of other private colleges and universities over the same time period–including mine, whose funding is primarily tuition driven.

    every higher education endowment suffered to the same degree as Harvard’s in 2008 and after; the Harvard endowment is by no means unique in that sense.

    Having said that, university endowments can be a pretty risky business; I wouldn’t classify them as hedge funds, necessarily, but they’re not always as conservative as you might think. I wouldn’t call Harvard a hedge fund with a university attached, though. Any university campus requires an enormous amount of money to run, and faculty salaries are a smaller slice of that pie all the time (the real scandal is compensation for and increasing numbers of administrators–but that’s a rant for another time). Cjboffoli is right that all that other stuff costs money, and the Harvard campus is one of the most extensive, with better facilities, that I’ve ever seen.

    As to the differential between the fund managers’ compensation and that of the faculty, I agree it’s insane, but let me ask: what would you have them do? Harvard cannot function on tuition alone; the price per student would be prohibitive (you think it’s high now…). The amount of money their managers make is commensurate with the industry. Meaning, if they want to hire managers remotely qualified to do the job, they have to pay them accordingly. Likewise the faculty compensation–and Harvard professors, believe me, make a LOT more than the majority of their professional colleagues. (Did you know that most professors in this country are essentially one-year contractors with no job security? Did you know that a lot of them work for multiple employers and are paid by the course?)

    I believe that’s called the free market. I have to wonder if all those people suggesting that universities should run themselves like businesses had this in mind.



    I guess I should qualify my position, which was mostly to get some thoughts on the way Harvard (and undoubtedly other) major Universities approach their funding.

    I completely get the need to gather and maintain a robust endowment – lord knows we don’t throw the kind of public funding at any educational institution (public or private) that we might or even used to.

    I AM wondering if we’re getting to the point where we’re creating, or have created, Too Big To Fail private Universities who will get bailed out regardless of the risky decisions they may make with regards to the nest eggs.

    You only need to look so far as the names of the folks running these investments to know they know how to work the political system if needed. And as an aside, the Harvard managers were/are so close to Wall Street that they undoubtedly knew some of what they were investing in was at least very risky, if not dubious in nature.

    Sure, I’d rather have an educational institution get bailed out rather than a bank, but I personally think TBTF should be reserved for things that don’t have ready alternatives.

    What would have been your thoughts if Harvard HAD declared bankruptcy and asked for bailout in ’08?



    >>And as an aside, the Harvard managers were/are so close to Wall Street that they undoubtedly knew some of what they were investing in was at least very risky, if not dubious in nature.

    –Correct me if I’m wrong, but isn’t Harvard the biggest single source of lawmakers, federal regulators and . . . (drumroll) . . . finance capitalists?

    Saying that Harvard is too close to Wall Street is like saying fish are too close to water.

    Harvard isn’t too close to Wall Street.

    Harvard is Wall Street.


    Here’s an article that discusses the interdependency between the two institutions. According to it, 41% of Harvard’s 2007 class of MBAs went straight to the Street.


    And speaking of fishies . . .

    Do you know how a clownfish avoids getting stung by the tentacles of the anemones in which it frolics? If you understand that, you’ll understand the relationship between Harvard and Wall Street.



    I get the analogy, DBP. I’d like to add a twist. I’ve recently started to think that the depravity of the Street is even more self-centered than I used to.

    To wit: I don’t think that these guys/gals care a good damn about whatever institution/company they ostensibly work for. All they care about is getting their bonus and making sure it’s as large (or preferably larger) as their poker buddy got last quarter.

    Firm tanks? Too bad. University endowment hammered? Oh well. Did you check my new place in the Hamptons??? Sweet.

    They have now been trained to expect to be compensated financially regardless of the outcomes. Best and Brightest!!



    Interesting question, Wakeflood. It gets to some of the reasons why university endowments have gone the way they have, and why college has gotten so expensive (as an aside, I highly recommend Archibald and Feldman’s Why Does College Cost So Much? for an analysis of that very question; the short version is that higher ed doesn’t scale well), and why Harvard in particular has such a close relationship with Wall Street, as DBP commented.

    Because, look, it’s not hard to get an MBA; I can reel off several schools in this region that offer them. But there’s MBAs and MBAs, and most of the people who get one have about as much chance of scoring a high-flying investment gig as that clownfish has of rescuing his kid from a fishtank in Sydney. (I love that movie.)

    There’s a lot that needs to change about how higher ed is run. I find it ironic that for all of Harvard’s smarty-pants investment practices, its endowment would be doing better if it had stuck to a more traditional stock-bond balance instead of getting into more speculative arenas.



    Thanks for the reading recommendation, DM. I’ll put it in the queue. Here’s one back atcha’: Chris Hayes, “Twilight of the Elites”.

    BTW, do you speak whale?? ;-)



    Wakeflood: When and for long did you work on Wall Street? Or is your opinion just formed from sitting behind a computer in West Seattle?

    In truth, the Finance world is less binary than you seem to suggest. For every “big swinging dick” at Goldman who cares about nothing but a $850K base salary and $3.5 million in bonuses (much of which goes to taxes in NYC where many people in finance work) there are legions of bright young people working very long hours in jobs that keep the world’s financial engine running. Their work creates jobs and research. It allows businesses to hedge against commodity costs. It creates entrepreneurship and innovation. It allows commerce to take place without the burden of paper money and coins needing to change hands. It plays a critical role in directing savings into productive investment. There are myriad ways in which the capitalistic world of Finance benefits us all. Of course none of it is as good a headline as “Wall St. fat cats work the system and we all get ripped off again.”

    A lot of Ivy League graduates pursue jobs in finance not because it is a life-long goal for them to work 100 hour weeks (albeit with free car service home after 8pm) until well into their 30’s, but because a) their undergraduate education has burdened them with considerable debt, b) they’re recruited aggressively by top banks and consulting firms, c) there is a calamitous lack of PhD funding available for students who would otherwise pursue higher degrees and post-graduate research.

    While you question the economic model of higher education finance, the truth is that if institutions like Harvard were more aggressive in the management of their endowments (and alumni were more charitable in their giving to their alma maters) students would carry a lower debt load and would have the flexibility to pursue careers outside of Finance.

    With all of that said, Ivy League colleges graduate a lot of brilliant people who do a lot of amazing things outside of Finance. They are responsible for advances in science, medicine, aerospace, mathematics, social sciences, etc. Many more of them are busy at work solving the world’s problems than creating new ones.



    Nice, snarky opener! Am I supposed to feel chastised for having an informed opinion? Or do I need to run my credentials by you for determination? Get back to me on that as you have time. In the interim, let me see if I can respond adequately:

    1. I never worked in WS but my father, brother and sister were all career bankers. They noticed a significant change in perspective in the early 80’s going forward of the influence of NOT risk-averse guys coming out of school whose role models were the Michael Milkens of the world. Get in, get mine, move on.

    Maybe Paul Volker’s words have some application here: “But I am struck by the number of not just friends but other observers who share the belief that there has been a real change in the mental approach of people in markets. They used to be more customer-oriented, with some sense of fiduciary responsibility that’s been very much reduced into an impersonal, “you’re a counterparty, you’re not a customer” caveat emptor.

    That attitude lies behind a lot of these difficulties and has been spurred by enormous changes in compensation practices that have tempted people to cut corners.”

    Or to sum up, again from Volker:

    “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,”

    Now maybe you consider my family’s 50+ yrs. of investment banking experience useless, or believe Volker a fossil or irrelevant, but I suspect that would be more a reflection on your perspective than his bonafides.

    2. Having said that, I completely agree on the points you bring up re: non-finance related education and career opportunities. I’m not sure I’m willing to make a direct connection between those two areas either as a choice to pursue one vs. the other, OR whether the financial sector has a profound impact on supporting those other educational areas, but I’m willing to be open-minded.

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