In 1966, nearly a decade before the Harvard Management Company was created to invest the university’s assets, journalist Gay Talese was tasked with writing a profile on Frank Sinatra. Having flown to Los Angeles to get some face time with the man himself, Talese discovered that Sinatra had a cold and had no interest in granting Esquire magazine an audience.
So, Talese set up shop among the palm trees and movie stars, stalking Sinatra’s entourage to the nightclubs and bars they frequented. He never spoke to Sinatra, but the story that came out of Talese’s experience—“Frank Sinatra Has a Cold”—quickly became known as a seminal work of the New Journalism school.
Fast forward 43 years, and it seems everyone associated with the Harvard Management Company has taken the cue from Sinatra. Despite posting a remarkable average return of 13.8% between 1998 and the summer of 2008, HMC managers, as a matter of policy, are a reclusive bunch. Now, they have reason to be: It is very clear that the mighty Harvard endowment, for years the Sinatra of the institutional investment world, has caught a vicious cold.
Kaingaroa Forest, New Zealand
A Radiata pine takes three decades to reach its harvesting height of 30 meters, its bright green branches, small and straight, competing for sunlight with its closely bunched neighbors. Grown almost exclusively on plantations, the Radiata is quick to sprout and versatile in use, which makes for an enticing investment. The largest such plantation south of the equator is the Kaingaroa Forest, on the North Island of New Zealand. The majority owner of this forest is the Harvard Management Company.
A forest in the South Pacific might seem like an odd investment for America’s oldest university, yet this timber symbolizes what the Harvard endowment has become: one of the most sophisticated and persified portfolios in the world. Fixed-income and equities are the traditional bastions of endowment investing, yet it is among the fissured bark and needle-covered ground of this foreign forest that the recent history of HMC can be told. It is here, among these towering pines, that we can begin to see how the shift into such alternative investments may have caused the endowment to, like Sinatra, catch a cold in today’s turbulent economic climate.
By the end of the third quarter of 2008, it was evident that the Harvard endowment was in trouble. An autumn letter to alumni from President Drew Faust confirmed that HMC had lost 22% since July 1, 2008—an $8 billion hit for the endowment. HMC now is unloading private equity holdings, while the university is commencing a large bond offering, both indications of a dearth of cash. What is not so obvious, however, is why Harvard—both a microcosm of the institutional investment world as a whole and a leader that others look to for implicit advice—found itself so exposed to begin with.
The endowment itself started as a book drive. Named after the clergyman who in 1638 donated his entire library to the fledgling college, Harvard, over hundreds of years, amassed vast wealth. The endowment was substantial enough by 1974 that the university decided to create its own wholly owned investment arm, the Harvard Management Company, which was nurtured for its first 16 years by Walter Cabot, a scion of Boston society. Only in his waning years did Cabot begin to move away from bog-standard stocks and bonds into more esoteric investments. When he left in 1990, his baby stood at more than $5 billion.
In strode Jack Meyer. Arriving via Harvard Business School and the Rockefeller Foundation, Meyer was no Boston Brahmin. Sporting a thick, brown mustache and a penchant for delving deeply into his investments—as an example, he had professional lumberjacks on staff who would help him choose and manage forests such as the Kaingaroa—Meyer made it clear that he would go anywhere and invest in anything to create return for Harvard. He quickly created the Policy Portfolio, which set out what percentage of the endowment would be in each asset class and acted as HMC’s internal benchmark, and he expanded investments to include faraway forests, massive real estate holdings, and other investment exotica. Over the course of his 15-year tenure at Harvard, Meyer added $12.2 billion over and above what the average large institutional investor would have achieved, and the fund stood at $22.6 billion. When Meyer decamped in 2005, Yale—Harvard’s rival and possessor of the second largest university fund on earth—had a total endowment of $13 billion, almost exactly the equal of what Meyer had added.
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.
Yet, Meyer and Harvard, ever hard-bargaining, managed to finagle money out of all the faithfully departed. On top of retaining the investment expertise of teams known for crushing their respective benchmarks, HMC negotiated revenue-sharing deals with all three firms. In return for the large sums invested, Charlesbank agreed to give 25% of its revenue to Harvard, while Adage agreed to cough up 20%. Regiment also gave up an unspecified amount of its revenue in return for seed money. Used to offset fees that Harvard owed to the firms, these arrangements created the possibility that other universities, attracted to the Ivy pedigrees of certain hedge fund managers, might indirectly be paying Harvard to have their endowment managed. Not a bad deal for the world’s richest university.
By seeding these start-ups, Harvard increasingly was looking to outside managers to invest its funds. A decade prior, 85% of endowment assets had been managed internally but, by the time Adage was founded in 2001, that figure was down to 55%. The HMC chief, it was clear, was intent on finding the best managers he could. If it meant dismantling the internal structure that had long defined Harvard, then so be it. Jack Meyer was not interested in tradition. He was, however, interested in alpha.
As this search proceeded, a trend emerged. When the bull market reigned, Harvard’s money managers would make haste for greener pastures. When things in the outside world were uncomfortably volatile or depressed, they stayed put. So, when the combination of a bursting tech bubble and terrorist attacks dampened America’s markets, some semblance of stability returned to the Harvard Management Company.
Of course, long-term stability is elusive in the investment world. Fortunately for the global economy, the downturn following September 11, 2001, was a relatively brief one. For Harvard, however, the recovery led once again to mass emigrations. First to go was Jeff Larson and 17 of his fellow staff members. Their creation, Sowood Capital, sprouted in March 2004 with a total of $700 million from their initially sole investor and former employer. The following year, David Scudder left to start Aureus Capital Management after seven years at the helm of Trusts.
By this point, it was clear to most outside observers that it was not only the American entrepreneurial spirit that was pushing managers to depart. Internal pressure, in the form of an often vehemently outspoken element within the alumni, faculty, and undergraduate populations, was increasingly to blame for the exodus from 600 Atlantic Avenue.
Kremlin on the Charles
About three miles up the Charles River from Boston, just past the sharp Weeks Bridge turn, sits the core of Harvard University. To the south of the windswept water sit the red-brick buildings of the Business School campus. To the north is the College, its famous Yard watched over by a bronze likeness of John Harvard himself, enclosed by dormitories, classrooms, and local shops. This undergraduate center is its own self-contained world; residents can be completely content without ever setting foot outside the 500-meter radius that encircles the hallowed statue. It is in this microcosm, within sight of the benefactor, that the most vitriolic calls for managerial scalps were heard five years ago.
HMC is a nonprofit organization and, thus, it must submit a Form 990 to the IRS annually. Among other things, this form requires the company to disclose publicly its five most highly compensated employees. Like clockwork each year, these figures are published in the school’s daily, The Harvard Crimson, which then is dropped in the mailboxes of students and faculty on some brisk winter morning.
Cue the uproar. They don’t refer to it as “The Kremlin on the Charles” for nothing. Many Harvard students and faculty are united by their distaste for the excesses of capitalism, and this was expressed regularly in the form of outrage over endowment investors’ compensation. The largest collective convulsion came in the spring of 2004, following the revelation that the top five managers earned a combined $100 million in the previous fiscal year. With students supporting themselves through loans, alumni wondering what their alma mater does with their generous donations, and faculty members staring anew at what seemed like relatively meager paychecks, the suggestion that five men could earn this much within the same institution was galling. Never mind the fact that the vast majority of these funds were delivered via performance bonuses subject to clawback: The idea that a manager could take home $30 million while the janitor who swept his office at midnight made just above minimum wage attacked the sensibilities of many on campus.
“The highest possible returns should never be the only goal,” notes Brian Palmer, a lecturer on religion at Harvard during the 2004 compensation scuffle and a campus leader in the cause to lower salaries. “And in a community where many are struggling—from dining hall workers to students with loans—seeing a community member get $6 million a year is less of an affront than seeing that person get $100 million a year.”
David Scudder sees things differently. “There was constant carping from people about the compensation system,” he recalls. “The critics always talked about salaries. That’s not the right word.” The salaries were quite low for this line of work, he notes; the large sums bothering critics were actually the result of super-size bonuses that could be rescinded in the future. In the boom years between 2002 and 2006, when Scudder himself departed, it was exceptionally hard to retain talent. Add to that the uproar over compensation, and “they left,” Scudder says. “Walked out the door.”
Manager migration was not the only consequence of the protest movement. On top of departures taken to avoid public scrutiny of compensation, it also raised the fees that Harvard paid to have its money managed (Meyer pegged this figure at double the cost of managing funds internally). Perhaps more importantly, it also induced Harvard to put a cap on its payouts, a move that was seen by many as inhibiting the attraction of top talent.
What happened next, in the fall of 2005, was earth-shattering for the Harvard endowment. A source close to Meyer says that the final insult came when President Larry Summers and Harvard Corporation member Robert Rubin failed to publicly support the HMC chief and his team in the salary debate. Armed with anger both at this slight and the constant internal criticism, Meyer—along with 30 colleagues, including his top fixed-income stars Maurice Samuels and David Mittelman—did what he had long been expected to do. He quit.
Newport Beach, California
If you are looking for a place in America as geographically and ideologically far from Cambridge as possible, Newport Beach—with its palm trees and California sunlight and Republican voters—might be it. There is no cold wind to elude, no rock-hard rivers reminding you of three months of winter to come. Even as January approaches, the temperature floats pleasantly above 60 degrees. It is a beautiful and comfortable place to live, if you can afford it—and Mohammed El-Erian certainly can.
El-Erian is both a widely published financial author—his most recent book, When Markets Collide, was hailed as the best business book of 2008 by The Economist—and the co-CEO of Pacific Investment Management Company (PIMCO). Nestled between an upscale shopping center and the third hole of the exclusive Newport Beach Country Club (membership fee: $48,000), PIMCO’s world headquarters are unremarkable for a fund that manages $1 trillion in assets. Regardless of its lack of accoutrements, this building is where millions are made, and it is here that the decidedly odd marriage of Mohammed El-Erian and the Harvard endowment begins and ends.
When Meyer and his team walked out the door in 2005, Harvard was left in a pinch. While views differ on Meyer’s actions—Scudder states that the separation was not “acrimonious” and the university “understood his motivations,” while Palmer believes Meyer “showed that his loyalty was only to himself, not to the Harvard that made him so wealthy”—it was certainly a blow to the endowment. HMC sought to mitigate its loss to some degree by investing with Meyer’s new firm, Convexity Capital, to the tune of $500 million, an amount supposedly limited by Meyer and not Harvard. However, the university still had to find a replacement quickly.
It took a while. A team tasked with finding the next Jack Meyer—a group that included high-level university officials and two former U.S. Treasury Secretaries—zeroed in on the relatively obscure Egyptian-born Oxbridge-educated bondman after 10 months. Lured to Boston with promises of a solid bonus and the novel challenge of managing the multiple constituencies that come with an endowment, El-Erian, then a managing director for PIMCO, packed his bags in January 2006 and headed east.
El-Erian had never managed a stock portfolio before arriving at Harvard. Some questioned his lack of skill in the game of politics, a required art within any endowment. He had no previous connection with the university, and he was not well-known outside the bond community. The announcement, therefore, came as a surprise to many. He was chosen, the university stated at the time, because of his specialization in global economics stemming from his stint at the IMF. Whatever the concerns, El-Erian seemed to arrive in Boston with an understanding of what his job as president and CEO of HMC would require.
Then-university President Larry Summers had expressed a keen interest in further integration between the university and HMC. Jack Meyer had kept a tight circle of advisers when heading the investment arm, the most prominent being HMC board member and Business School Dean Jay Light. Although universally considered by students to be preoccupied with everything except their education, Light was by all accounts a significant asset to Meyer. Beyond Light, however, few names arise as known close confidants of the former HMC boss.
El-Erian made a point of going further than Meyer in this department. “El-Erian perhaps tried to reach out more broadly than Jack did,” Scudder says, although he offers the caveat that he himself was no longer directly involved during this period: “Jack had a few key people, but I wouldn’t say he tried to reach out to as broad a group.” To accomplish this outreach, El-Erian made overtly public overtures to university faculty, involving them at least on a superficial level in basic decisions about where the endowment was heading.
Besides community outreach, El-Erian also had the lofty goal of restructuring the Harvard Management Company. Speaking to Bloomberg at the close of 2006, El-Erian asserted that the university should “not have to go through such a transition again,” referring to the departure of the fixed-income team. The task of restructuring would be a “marathon”; no quick fixes would be found. To begin this race, he made a significant decision, one that, at the time, was seen by many as prudent but, in hindsight, was masterfully ill-timed—he set out to reduce the fixed-income exposure of the endowment.
When Meyer and his team left, they sent a clear message: Be wary of overreliance on a single strategy or group. With little tying managers to the endowment besides loyalty, El-Erian knew that he could well be exposed to the risk of one day arriving at 600 Atlantic Avenue and seeing empty desks. To avoid such desertions, El-Erian rebalanced Harvard’s Policy Portfolio and reduced bond exposures significantly. The trend continues to this day: For the current fiscal year, Harvard has only 9% of its endowment in fixed-income investments, the same percentage as such classes as timber and real estate.
This worked well, for a time: In the first full year under El-Erian, HMC returned 23% on its investments, besting the university’s benchmark by 5.8%. Annoyingly, Yale made 28% in that same time frame, but only the most cantankerous Harvardian could complain about the best returns the school had seen in years.
Then, suddenly, El-Erian was gone. Only 23 months after he arrived, he was back under the cobalt-blue sky of Southern California, watching golf balls shoot by his office window at PIMCO. Citing family pressures, El-Erian’s marathon ended more like a sprint, and Harvard was left leaderless once again.
Back Bay, Boston
500 Boylston Street is built on pillars of sand. An ornate office building in Boston’s Back Bay—the posh borough bordering the south side of the Charles River basin—500 Boylston and its stately neighbors sit on what used to be an uninhabitable salt marsh. Starting in 1859, this marsh was filled with gravel and dirt brought in by trains arriving every 45 minutes for nearly half a century. The sons of Boston society gradually followed, bringing with them some of the city’s most prominent businesses. In time, former HMC manager Jeffrey Larson’s Sowood Capital would take up residence here, on the 17th floor of 500 Boylston. A $3 billion hedge fund, Sowood was levered to the hilt in hopes of maximizing returns for its investors, one of which was Harvard. Instead, in a structure built on landfill, while Mohammed El-Erian was busy producing sizable returns for the endowment, Harvard had its first glimpse of the perils of leverage.
When Jack Meyer began to accelerate the outsourcing of the endowment’s management, larger fees to managers were not the only consequence. Although HMC used small amounts of borrowed money—sources say that, internally, the endowment was levered about two to one, a figure that has fallen dramatically since Meyer’s departure—it had never before been exposed to extreme leverage. When Meyer seeded the hedge funds of former managers, he was also for the first time exposing Harvard to what many call “the death spiral.” For a time, the university saw no major drawdown due to the excesses of leverage but, in the summer of 2007, this would all change.
It started innocently enough. Larson, a former commodities and equities trader, was taking a classic bet: go long on senior debt while going short on junior debt and stocks. Spreads between commercial paper and Treasury bills were tight—meaning that the market believed defaults to be very unlikely and, thus, was willing to lend them money at cheap rates—and Larson clearly expected them to remain that way. His hedge was the shorting of junior debt and stock, in the belief that, if defaults occurred or were seen as more likely, the junior debt and stock market would fall by just as much, causing the short-sale to protect him. To make his bets pay off more handsomely, Larson borrowed about $18 billion to supplement the $3 billion that he had raised from Harvard and other investors. The collateral for the loans were the assets he bought with them.
A funny thing happened at the end of July 2007 though: The markets did not behave the way they usually do. Over the final weekend of the month, spreads between senior debt and Treasury bills widened at an alarming pace when investors became spooked about the potential for defaults. However, there was no corresponding decline in the stock market, leaving Larson exposed on both sides of the trade: He was losing money with the purchase of senior debt, just as he was with his shorts. His lenders, wanting security, began to demand more collateral for their loans. This forced Larson into selling assets—first, ones that he could offload at good prices and then ones he could not. On the Friday, Larson was down 10% on the year; by Sunday, this figure was more than 40%. The assets he still held were illiquid, yet lenders were still demanding more collateral. He was, by this point, levered 12 to one. To fend off disaster, he approached his former employer for a large investment or a line of credit, but was rebuffed by El-Erian. In a desperate act to save at least a percentage of the original investments, he sold the remaining assets to Ken Griffin’s Citadel Investment Group. Investors lost at least half their money in one weekend.
Harvard lost $350 million, a significant but not debilitating sum. Other investors lost just as much, and many were less able to withstand the drawdown. If Larson had executed such a strategy at Harvard, he would have survived the initial hit and gone on to make a healthy profit, just as Citadel has done with Sowood’s leftovers. However, on his own, Larson lacked the money to back up the trade.
This exposed a serious problem with Harvard’s structure. When HMC invested with its former managers, they expected to get the same returns as when these men worked in-house. However, what they usually saw was increased leverage and risk borne by funds lacking the financial resources of HMC. Any returns, although often solid, were built on unstable ground; with less oversight and financial heft, the managers who departed Harvard were increasingly prone to the kind of death spiral that Sowood Capital experienced.
Despite being burned badly by Larson, the collapse of Sowood did not fundamentally alter HMC’s approach to its alternative holdings. El-Erian, who was heading the endowment during the turmoil, made no move to decamp from more esoteric investments, leaving Harvard exposed to often-solid returns but also incalculable risk. When he decided to return to California, many outsiders watched to see whom the venerable institution would pick to fill his place. Through their choice, Harvard would be sending a signal on how these investment, prone to being built on the flimsiest of ground and subject to sudden sickness, would be handled going forward.
Wellesley, Massachusetts
There’s a tradition at Wellesley College, the all-women’s school located 15 miles outside Boston. On graduation day, the women of Wellesley run a race rolling wooden hoops. The winner—who, as lore has it, will be the first woman in the class to achieve success—is given flowers and tossed into the sublime campus’ Lake Waban. The tradition dates back to only 1974, when a daintily dressed Harvard man infiltrated the ceremony. He won the race, his raid was uncovered, and he was punished summarily with a dip in the pond.
This was not the last time Harvard raided Wellesley. Following El-Erian’s departure in January of 2008, Harvard decided to stay close to home, making the decision to pluck endowment chief Jane Mendillo from her lush surroundings in the Boston suburb and bring her to 600 Atlantic Avenue. While Mendillo wrapped up her affairs at the fund she had led since 2002, Robert Kaplan, former Goldman Sachs vice chairman and Harvard Business School professor, ran HMC on an interim basis. In July of 2008, Kaplan handed the reins to Mendillo.
Mendillo was no stranger to the Harvard endowment. She was employed by HMC from 1987 until 2002, assuming a number of positions that culminated in her appointment as vice president of External Management in 1997. Upon her move to Wellesley, she assumed control of $1 billion, turning it into $1.7 billion by 2008. She constantly beat the school’s own Policy Portfolio, which made her an enticing choice for the fund up the road. If nothing else, her choice signaled that, despite the concerns regarding leverage exposure wrought by the collapse of Sowood, HMC was not changing its basic strategy. Unfortunately for Mendillo, however, clouds were growing on the horizon just as she took control.
Fast forward a year, and Harvard is feeling the downpour. Mendillo arrived a day after the end of Harvard’s fiscal year, one in which it posted an 8.6% return, nearly 2% above its internal benchmark. Considering the market volatility and recent management turnover, this was no mean feat and, as would seem normal for a university acquainted with perennial alpha-generation, expectations for Mendillo’s start were high. However, by early December, on top of initiating a fire sale of $1.5 billion in private equity holdings and issuing $2.1 billion in bonds, university officials were talking openly of tightening their belts, taking a close look at hiring and compensation, and bracing for more bad news ahead. Despite its still-massive endowment, Harvard was searching for cash.
The private equity sale in particular painted a startling picture for Harvard. Reportedly hampered by lack of interested buyers, the sale came within two months of an open letter touting the university’s overlay strategy, intended to fend off extreme market events through the use of futures contracts. The annual report from the fiscal year ending in July 2008 practically bragged of the value added through risk management procedures. HMC’s Web site, although usually unhelpful, claims that it closely manages correlated risk factors. None of this, in the end, stopped Harvard from catching the most violent of colds. In echoes of Long-Term Capital Management, overconfidence in its ability to manage risk may have caused Harvard—and, indeed, many other investors—to forget that 100-year storms have been happening at a decidedly quickened pace as of late. Returns that were supposed to be in opposition were, all of a sudden, correlated. Value-at-risk measurements, based on the belief that markets are distributed normally, were rendered meaningless when fat tails emerged and, instead of patting themselves on the back as they had in the summer, Harvard was starting to sweat.
Little of this can be pinned on Mendillo. The risk controls and culture in place were not hers, and the portfolio she inherited, for all the logic of persification, was uniquely ill-suited to survive such events. Because Jack Meyer’s expansion into investment exotica came at the cost of liquidity—something worth its weight in gold in such times as these—Harvard has been unable to be the nimble player it would like to be. Because of management turmoil seen at least in part as a response to overheated internal debate regarding salaries, HMC has been left with less institutional memory, less oversight over outside managers, and more exposure to leverage. Because of Mohammed El-Erian’s reaction to Meyer’s departure—a swift and masterfully ill-timed reduction in fixed-income investments—Harvard has been left impossibly exposed. All might have been reasonable actions at the time—and they created immense profits for two decades—but these decisions are at the root of the violent coughing fit Harvard is experiencing now.
While the Management Company originally claimed that there would be no alteration to its internal workings, time and pressure have caused them to stray from this course. In early February, the university decided to cut up to 25% of HMC staff, a figure that reportedly includes more than just back-office personnel. Employees who survive the purge are likely to stay; the fund—which, for years, has had a serious and constant talent retention issue—almost always sees stability in its staff when turmoil in the outside world abounds. As for future investment strategy, Harvard will likely attempt a balancing act. No longer can liquidity—the new black of 2009—be ignored. Cash and fixed-income holdings will be stepped up, insiders say, but there will be no abandonment of esoteric investments because of Harvard’s cold, only a readjustment in its asset allocation model.
That’s the party line, at least, but, to the analytic eye, the party is over. History, and Talese’s story, show that Sinatra got his voice back; HMC never will. The extraordinary system that generated extraordinary returns is finished, a victim of changing attitudes toward risk. Like virtually every corporate pension fund, the recent crisis has taught Harvard that discretion matters more than valor, and that the institutional investment world has reached a new mutation—risk, no matter how intelligently embraced, is only worth embracing on the margin. The Harvard community, which in the end the endowment serves, will not be forgiving if losses of such magnitude are seen again and, thus, HMC in all likelihood will opt for consistency over outperformance. Risks that were taken before—with startling success until recently—will not be seen again at America’s largest university endowment. The Harvard Management Company will retreat into the pack, once more just one among equals. What set it apart for so long has gone, and it left for good the moment the endowment caught its current cold.