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.