BusinessWeek – Hot portfolios at Harvard and Yale have smaller colleges moving aggressively into hedge funds. They may be putting their endowments in jeopardy
When the multi-billion dollar endowments at Harvard and Yale reported stellar returns during the bear market, endowment managers at other colleges took notice. Harvard and Yale didn’t get there by investing in boring stock index funds. Instead they did it by putting sizable chunks of their portfolios into hedge funds, the pricey, lightly regulated, and highly secretive investment pools that cater to big institutions and wealthy individual investors. As of June 30, 2005, the most recent date for which data are available, Harvard and Yale had 12% and 25% of their respective endowments earmarked for these alternative investments.
For better or worse, that success has encouraged many of the nation’s biggest schools to follow the Ivies into the hedges. “In the endowment world, there is a follow-the-leader mentality,” says Mike Scotto, director of alternatives research at Hewitt Associates Inc. (HEW ), an advisory firm. Schools with endowments of $1 billion or more had an average of 21.7% in hedge funds in 2005, according to the National Association of College & University Business Officers (NACUBO).
But some of the most aggressive hedge fund investors, it turns out, are the littler guys. According to a BusinessWeek analysis of data from nonprofit NACUBO, a dozen endowments had more than 40% of their portfolios in these higher-risk investments as of June 30, 2005 (table). They include the College of Wooster in Wooster, Ohio, at 82.4% and Yeshiva University in New York City at 65.3%. “We very much all envy the success of Harvard and Yale’s endowments,” says Bob Walton, vice-president for finance and business at the College of Wooster. “When you look at how they achieve their returns, a lot of it has come through alternative investments like hedge funds.”
