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 losses.
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Harvard University's admission that it lost $8 billion from its $36 billionendowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of theloss between from July 1 through Oct. 31 2008. According to a source close the HarvardManagement Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18billion 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 exceedinglywell for Harvard during the early years of the new millennium. From 2000 to 2008, they morethan quadrupled the notional value of Harvard's wealth through a strategy that involved shiftingthe lion's share of Harvard's money from American stocks, bonds and cash to to highly esotericinvestment which were not only illiquid but whose imputed value often could not be easilydetermined by outside parties. So, by the time the bubble burst in the fall of 2008, less than afifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds. Where wasthe rest of Harvard's money? Nearly 28% of Harvard Endowment fund was in what the fundmanager's called "real assets," a category comprised of timber forest and arable land in remoteareas, commercial real estate participators, and huge stockpiles of oil and other physicalcommodities. Such "real assets" plunged in value, if they could be sold, much more severelythan the stock market averages. Oil, for example, one of the fund's largest investment, lost aboutt two-thirds of its value. Another huge chunk of the endowment was in private equityplacements 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 itsinvestment by selling its participation at a steep discount to a "secondary" hedge fund. Another11 percent of Harvard's money had been sunk in volatile emerging markets. Here the investmentstook a double hit: First, the local stock markets collapsed in most of these countries, with, forexample, Russian stocks, losing 80%, of their value. Second, on top of these losses. the localcurrencies lost much of their value against the dollar, with the Brazilian Real, for example losing40% of its value. Given the true cost of getting its money out of this financial exotica, myknowledgeable source finds the claim by Harvard's money managers that the fund only lost 22percent 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 oftheir portfolio , Harvard University, which relies on the interest from its endowmentfund for one-third its budget, needs to be more realistic. As its President, DrewFaust, noted in letter to the Harvard faculty, "We need to be prepared to absorbunprecedented endowment losses and plan for a period of greater financialconstrain,"

The collateral damage goes far beyond the ivy-covered walls of Harvard. Money managers at other non-profit institutions, no doubt inspired by the dazzlingsuccess of the Harvard Management Corporation in rapidly multiplying thenotional value of its endowment fund adopted similar strategies, includingplunging their funds into the murky get-rich-fast universe of illiquid investments.Consider, for example, the adventures of Calpers, the giant pension fund of theCalifornia Public Employees' Retirement System, I which heavily invested in thesame sort of "real assets" as Harvard. Leveraging its own funds, It bought somuch undeveloped real acreage, that by 2008 it became the largest private land owner inAmerica, and as the real estate bubble expanded, it marked up the notional value of its portfolioaccordingly. Then came the subprime debacle, and the real estate bubble imploded, leavingCalpers with unsalable land and, because of its borrowed funds, a 103% loss. Together withother losses in hedge fund and conventional investments, Calpers found that it had lost nearly40% of the value of its entire pension fund. In Calpers's case, it had little choice other than torealistically report its enormous losses since it had pension obligations that now might requireraising 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 illiquidinvestments.

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