No longer sui generis, the Harvard Management Company has retreated back into the pack. The seeds of its collapse, it is now clear, were sown in its glory days.
One of the many who hail Meyer’s skill, and one of his few HMC colleagues who will talk on the record about it, is David Scudder, the vice president of Trusts for HMC from 1998 to 2005. Hired by Meyer after decades at the Wellington Management Company, Scudder has nothing but praise for his old boss. “Jack Meyer was one of the most gifted and original strategic thinkers in asset management,” he says. “There is no doubt that he did a brilliant job for Harvard.”
Certainly, on Meyer’s watch, Harvard thrived. However, within his accelerated persification strategy there lurked a virus: a potential liquidity issue that now has the Management Company reeling. The endowment is expected to provide about 35% of the $4 billion needed annually to run the university, covering costs such as salaries, expansion, financial aid, and more. Normally, this is not a problem; during an economic collapse, however, holding large amounts of esoteric investments when no one is buying makes this difficult. For an institution with large and recurring financial commitments, illiquidity is a potentially fatal sickness.
That, however, was but the beginning. Besides creating potential liquidity problems, the amplified persification of the endowment had another major impact on the university. Because abstruse investments require specialization, Harvard soon began to look for alternative asset savants. Determined to hire the best, HMC tried and often succeeded in luring talent in-house. However, when certain market and political conditions coincided, Meyer began to see some of his best and brightest walking out the door.
Financial District, Boston
This is not the Boston that guidebooks write about. It is not the North End, with its quaint 12-seat Italian restaurants that serve underage college kids a bottle of wine if their dates are attractive enough. It is not Beacon Hill, where the monied and cultural elite of the city lodge. There are no bistros in the cement jungle of downtown Boston; it is all gray and minimalist and efficient. And it is here, at 600 Atlantic Avenue, that the Harvard Management Company worked its magic, and where, a decade ago, Jack Meyer started another trend that would alter the structure of HMC: the accelerated outsourcing of its investment management.
One of the rarer features of the Harvard endowment is its hybrid nature—a portion of the money is managed internally, while the rest is invested with external managers. The benefit is clear: Have the manager with the best track record investing your money, and you’re likely to get the best returns, regardless of where they work. Under Meyer, Harvard did just that. Instead of sticking to internal managers, Harvard pursued the best investors wherever they were.
This outsourcing was not always purely by choice. Starting in 1998, a string of managers began to leave Harvard for the outside world. If the university wanted to retain the best talent, it had to be willing to seed these managers with cash as they stepped out the door.
The first major departure occurred in April of that year, when equities-specialist Jon Jacobson decided it was time to strike out on his own. His migration—and those that followed—was partially the result of Harvard’s rejection of a request by Meyer to allow managers to work with outside funds, a move that would have permitted them to receive additional compensation. Meyer had proposed such a system in hopes of persuading talent to stay within the fold but, when his suggestion was categorically rejected by the university’s highest governing body, talent began to look elsewhere. Jacobson, the brightest star within the Harvard constellation, quickly started the Boston-based hedge fund Highfields Capital. To mitigate the damage to its returns of losing its top manager, HMC handed over $500 million in seed money as Jacobson stepped into his new office atop the John Hancock building.
Within months of Jacobson’s departure, alternative investment guru Michael Eisenson and a large portion of his group departed to start Charlesbank, a fund devoted to private equity and real estate. Like Jacobson, they did not leave empty-handed; on top of continuing to manage $1.4 billion in direct investments for Harvard, they were seeded with $550 million in cash from the university. A short time later, Timothy Peterson made a similar move, decamping to start Regiment Capital. Two years of relative stability followed, but it would not endure. In July 2001, the Select Equity Team, tasked with investing in domestic equities for HMC, left to start Adage Capital Management. Headed by Robert Atchinson and Phil Gross, this fledgling fund was also doused in Harvard dollars—in this case, 1.8 billion of them.