In "Radical Overhaul" Harvard Endowment To Fire Half, Close Internal Hedge Funds, Outsource Asset Management

Tyler Durden's picture

In what may be the most stunning move in the asset management space in years, the WSJ reports that Harvard University’s endowment, which manages just shy of $36 billion, will undergo a "radical overhaul" in the way the world’s wealthiest school invests its money by outsourcing management of most of its assets and lay off roughly half the staff in the process.

According to the WSJ, about half of the 230 employees at Harvard Management Company will leave as part of a sweeping change by the university’s new endowment chief, N.P. “Narv” Narvekar. This means that the endowment will shut down its internal hedge funds and let go traders by the middle of the year. Additionally, the internal team in charge of direct real-estate investments is expected to spin out into an independent entity that Harvard is expected to invest with. Only management of Harvard’s natural resources portfolio and passively managed exchange-traded funds will remain in house.

Harvard’s hybrid approach took off in the 1990s when the endowment’s then-chief, Jack Meyer, built a large in-house hedge-fund to invest directly. He also oversaw the endowment’s early embrace of alternative investments like timber, hedge-funds and private-equity funds.

The changes are a break with the university’s long-held approach to managing its wealth. While Yale University and others park nearly all their money with outside managers, Harvard for decades deployed a “hybrid” approach, relying in part on its own traders to wager on assets such as stocks and bonds. It stuck with that model even after incurring deep losses in the 2008-2009 financial crisis, though the amount managed in-house has fluctuated over the years.

 

The $35.7 billion endowment currently provides more than a third of Harvard’s operating budget and contributes to the costs of student financial aid, research and professor salaries.

While Harvard’s returns have trailed rivals’ in recent years  - the endowment’s annualized gains of 5.7% over the 10 years ended June 30, 2016 are second- lowest in the Ivy League and below the comparable 8.1% returns of Yale University and Columbia University, it is difficult to envision underperformance as the reason for such a dramatic step. Still, that appears to be the reason. Here is the WSJ:

Mr. Narvekar’s decision to shut Harvard’s internal trading program reflects the challenges even the most sophisticated institutions face in actively managing their assets. Some alumni and faculty have criticized Harvard for paying its traders too much for returns that have lagged Ivy League peers’. At the same time, others have questioned Harvard’s ability to attract top talent with pay that is less than what hedge-fund firms can afford.

 

The moves represent a dramatic start for Mr. Narvekar, 54 years old, who began in December after 14 years running Columbia University’s endowment. Harvard’s fourth endowment head in a decade, he arrived with a broad mandate to boost returns. Already, Mr. Narvekar has dispensed with some traditions in his short time in Boston, where the endowment operates out of four floors in the Federal Reserve Bank of Boston’s building.

Richard Slocum, who most recently invested the personal wealth of New York Jets owner Woody Johnson, will in March become the endowment’s chief investment officer, according to people familiar with the matter. The position is a new role for Harvard and reports to Mr. Narvekar. Messrs. Narvekar and Slocum previously worked together at J.P. Morgan Chase & Co.

Narvekar joined after successive leadership shakeups, including the resignation of its most recent chief after less than two years, when the board decided it wanted a new leader to take a hard look at the hybrid model and determine where in-house management should be discontinued, reduced or increased. The endowmen chief intends to keep Harvard’s portfolio broadly diversified and has yet to determine where Harvard will redeploy the money its internal hedge funds currently manage, a person familiar with the matter said. Longer-term, the endowment’s asset allocations and current line-up of external money managers could change, the person said. Reshaping the endowment’s portfolio is expected to take about five years.

Remaining staffers will focus on Harvard’s portfolio overall instead of on specific asset classes. Mr. Narvekar plans to tie staffers’ pay to the endowment’s overall performance instead of that of their asset class, said a person familiar with the situation.

It will be interesting to see if other Ivy League schools follow in Harvard's footsteps and outsource the management of their own endowments.

The radical decision also means that the hedge fund space is about to become even more populated at the worst possible time for hedge fund fundraising, as some internal teams that leave Harvard may launch their own firms. Alternatively, they may just join the trading desks at one or more central banks who have become the world's most dominant asset managers.

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xythras's picture
xythras (not verified) knukles Jan 25, 2017 1:58 PM

Does this mean no more PC police on campus? Hard to believe.

Political Correctness is Killing Colleges

http://dailywesterner.com/news/political-correctness-is-killing-colleges/

But when the money is gone.. all BS is gone

The Management's picture

I bet there will be a lot of bleach bitting to be done now Trump IRS is cocked locked and ready to rock.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) The Management Jan 25, 2017 2:16 PM

Damn... EVIL... GREEDY... employer, that Harvard.

Since when has FREE $HIT FOR EVERYBODY not been a theoretically fully functioning organizational model at Harvard?

New_Meat's picture

since last year when they resisted embracing the stupid wage minimum thingie

Jeffersonian Liberal's picture

 

I wouldn't be surprised if the Replacement is simply offshoring these workers and handing the investment strategies over to offshore teams.

Luckhasit's picture

That's exactly what's going to happen.  They want an increase in returns, get money.

Jeffersonian Liberal's picture

Unfortunately, it almost never works out that way.

It benefits those who are given the jobs that others were fired from.

It benefits the executive who makes the decision and gets kickbacks from the offshoring company.

But anyone who works in these situations knows very well that, in the long run, offshoring does not benefit the company, the US worker, or the US economy.

SafelyGraze's picture

harvard can store its shiny in the university of texas repository

regards,
kyle bass, custodian 

TeethVillage88s's picture

IMH this is due to complexity of operating in ZIRP/LIRP environment. 2016-2007 = 9 years of manipulation by Private Federal Reserve.

But I'm not an expert.

RiverRoad's picture

And the smartest guys in the room are..............?

peddling-fiction's picture

Business --> The Wharton boys.

Science --> M.I.T. or CalTech

Venture --> Stanford

MisterMousePotato's picture

"Business --> The Wharton boys"

My brother graduated Wharton. With high honors. My nephew also.

Me? After two years at a tertiary institute of higher learning, the school and I reached a mutual understanding that I should continue my education elsewhere.

Even so, I am significantly smarter and better educated than either (and both) of them.

My brother has (no shit) hundreds of millions of dollars. I have been to his house. He has nothing I want.

Well, actually, he does have a pretty cool car. Not sure how practical it'd be here in snow country half the year, but honestly, I really feel no envy at all. In fact, I wouldn't switch places with him even if I could.

Having said that, if I could switch places with, oh, I dunno ... Tom Cruise? ...

peddling-fiction's picture

I hear you.

I know a very smart Wharton boy but both of us knew, that he had no Emotional Intelligence, so I led the company.

However, his IQ was up there and a priviledge to work with.

If you have some business savvy and also get into Wharton, its the contacts you make that are worth a ton of money.

 

RiverRoad's picture

Something tells me Trump would agree with you.......   ;-)

peddling-fiction's picture

Sneaky, sneaky. I see what you did there.

RiverRoad's picture

It's been said that, "All is not gold that glitters" (sorry Tyler). 

Very true.   Sexy cars notwithstanding.

BTW     Nothing beats "street smarts".   It ain't over 'til it's over.  Hang in there.

MisterMousePotato's picture

I always thought it was "All that glitters is not gold?"

I reread my comment and realized I might have given a false impression for, if Larry Ellison were my brother ...

Have you ever seen pictures of some of the houses Larry Ellison has acquired? (Apparently, Mr. Ellison buys houses like Jay Leno buys cars.)

Oh, wait. If my brother was Jay Leno ...

knukles's picture

Arrogance and Privilege --> Haaaaavaaaad

peddling-fiction's picture

Wonderful and delightful lawyers

RiverRoad's picture

Good luck being a lawyer these days unless your daddy owns the firm.

CheapBastard's picture

Could not happen to a shittier uni.

 

Just remember, for most of these Ivy schools [except maybe U Penn in Phili] you MUST check off the right box or you be tossed to the back of the bus.

iAmerican3's picture
iAmerican3 (not verified) Jan 25, 2017 1:46 PM

When Harvard goes belly up will be a great day in God's America.

peddling-fiction's picture

The ex-President's degree was a new low in that institution.

Doom Porn Star's picture

Without Affirmative Action ivy league college access gifting there would be no Affirmative Action Politicians bent on giving away everything others have earned to the Socialists and Identity Politics Expropriationists..

Son of Loki's picture

When Harvard goes bankrupt, there must be a clcebration..maybe a Million Deplorable Man and Women March thru Boston to cheer!

peddling-fiction's picture

Deans and head honcho's need to be removed.

Snowflake curricula melted.

High standards kept again.

They will be fine.

RiverRoad's picture

Maybe in 1,000 years considering the time line re institutional change....

peddling-fiction's picture

Think Turkey.

*cold wind draft, with a scent of jasmine*

innertrader's picture

ESPECIALLY since he doesn't even have a valid U.S. Birth Certificate!!!  I believe the MSM should be criminally charged for conspiracy for supporting barry soetoro and lying on his behalf to American!!!

 

https://www.youtube.com/watch?v=jk3KRxTfkLM&feature=youtu.be

 

TRIUMPH with TRUMP!!!

RiverRoad's picture

Oblahma's Arab scholarship......explains all his slobbering over those sheiks.

auricle's picture

Gartman is taking on new clients. 

Giant Meteor's picture

And long everything, to infinity and beyond!

south40_dreams's picture

Madoff Inc will do a fine job

Bill of Rights's picture

The rats are scurrying lol

Doom Porn Star's picture

"...the endowment operates out of four floors in the Federal Reserve Bank of Boston’s building. "

 

$36B being eggregiously mismanaged right inside the Boston FED?

Someone should call Larry Summers immediately!

Mr Perspective's picture

"The $35.7 billion endowment currently provides more than a third of Harvard’s operating budget and contributes to the costs of student financial aid, research and professor salaries."

So it takes ~$100 billion to operate Harvard? For how long? What the hell does the average tuition of $59,000 cover?

insanelysane's picture

Elizabeth Warren was making $400k to teach one class.

RiverRoad's picture

Pardon me while I throw up.

Giant Meteor's picture

"That's great. That's just fucking great, man! Now what the fuck are we supposed to do? We're in some real pretty shit now man! Game's over man, game's fucking over! What the fuck are we gonna do now? What are we gonna do?"

Mr Perspective's picture

OR:
Bluto: Hey! What's this lying around shit?
Stork: Well, what the hell we s'posed to do, you moron?
D-Day: War's over, man. Wormer dropped the big one.
Bluto: Over? Did you say "over"? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!
Otter: Germans?
Boon: Forget it, he's rolling.
Bluto: And it ain't over now. 'Cause when the goin' gets tough.........
... the tough get goin'! Who's with me? Let's go!

cowdiddly's picture

They could always bring Larry Summers back to lose another 4-5 billion.

Giant Meteor's picture

Hehhh, not bad, not bad at all !

Offthebeach's picture

Nothing in this world recovers from the deft leadership of Larry Summers. 

 

( "See Larry, see what happens?" )