How Much Has Harvard Really Lost?

Harvard University's admission that it lost $8 billion from its $36 billion
endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the
loss between from July 1 through Oct. 31 2008. According to a source close the Harvard
Management Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18
billion if the losses on the fund's illiquid investment are realistically appraised.

To be sure, the highly-talented-- and highly- incentivized- MBAs at HMC did exceedingly
well for Harvard during the early years of the new millennium. From 2000 to 2008, they more
than quadrupled the notional value of Harvard's wealth through a strategy that involved shifting
the lion's share of Harvard's money from American stocks, bonds and cash to to highly esoteric
investment which were not only illiquid but whose imputed value often could not be easily
determined by outside parties. So, by the time the bubble burst in the fall of 2008, less than a
fifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds. Where was
the rest of Harvard's money? Nearly 28% of Harvard Endowment fund was in what the fund
manager's called "real assets," a category comprised of timber forest and arable land in remote
areas, commercial real estate participators, and huge stockpiles of oil and other physical
commodities. Such "real assets" plunged in value, if they could be sold, much more severely
than the stock market averages. Oil, for example, one of the fund's largest investment, lost about
t two-thirds of its value. Another huge chunk of the endowment was in private equity
placements and hedge funds which imposed restrictions on withdrawals. In the case of so-called
"gated" hedge funds, some of which suffered enormous losses, Harvard could only extract its
investment by selling its participation at a steep discount to a "secondary" hedge fund. Another
11 percent of Harvard's money had been sunk in volatile emerging markets. Here the investments
took a double hit: First, the local stock markets collapsed in most of these countries, with, for
example, Russian stocks, losing 80%, of their value. Second, on top of these losses. the local
currencies lost much of their value against the dollar, with the Brazilian Real, for example losing
40% of its value. Given the true cost of getting its money out of this financial exotica, my
knowledgeable source finds the claim by Harvard's money managers that the fund only lost 22
percent not only "purely pollyannaish" but self-serving (they got increased bonuses for 2008).
But while Harvard's money managers may chose to look through rose color glasses at the value of
their portfolio , Harvard University, which relies on the interest from its endowment
fund for one-third its budget, needs to be more realistic. As its President, Drew
Faust, noted in letter to the Harvard faculty, "We need to be prepared to absorb
unprecedented endowment losses and plan for a period of greater financial

The collateral damage goes far beyond the ivy-covered walls of Harvard.
Money managers at other non-profit institutions, no doubt inspired by the dazzling
success of the Harvard Management Corporation in rapidly multiplying the
notional value of its endowment fund adopted similar strategies, including
plunging their funds into the murky get-rich-fast universe of illiquid investments.
Consider, for example, the adventures of Calpers, the giant pension fund of the
California Public Employees' Retirement System, I which heavily invested in the
same sort of "real assets" as Harvard. Leveraging its own funds, It bought so
much undeveloped real acreage, that by 2008 it became the largest private land owner in
America, and as the real estate bubble expanded, it marked up the notional value of its portfolio
accordingly. Then came the subprime debacle, and the real estate bubble imploded, leaving
Calpers with unsalable land and, because of its borrowed funds, a 103% loss. Together with
other losses in hedge fund and conventional investments, Calpers found that it had lost nearly
40% of the value of its entire pension fund. In Calpers's case, it had little choice other than to
realistically report its enormous losses since it had pension obligations that now might require
raising money from local governments in California. Other nonprofit funds with more leeway,
such as Harvard, have yet to fully come to grips with the problematic value of their illiquid