Harvard Confirms Swap, Real Estate Losses

Although the fund was known to be down 27% on the year, the recently released annual report shows that the University lost big on interest-rate swaps and real estate in fiscal 2009—and that the University also was, unusually, investing much of its General Operating Account alongside the rest of the endowment.

(October 22, 2009) – Harvard University has confirmed massive losses stemming from bad interest-rate swaps and poor real estate deals, and also has revealed that it was investing, alongside its more illiquid endowment, much of the cash needed for day-to-day operations.


Although the University’s losses of 27% have been known since early September, Harvard, with the release of its annual report, has confirmed many suspicions regarding its unprecedented fall from grace, chronicled in ai5000’s inaugural edition in June. According to the report, the endowment was caught off guard by the “unprecedented” fall in interest rates last year, causing them to terminate—for a cash payment of $500 million—$1.38 billion in interest-rate swaps bought into years earlier, reportedly at the behest of then-University President Larry Summers. As a hedge against further drawdowns, Harvard also entered into new swap agreements in fiscal 2009 in order to offset other such agreements, locking in further unrealized losses of $425 million.

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The report also reveals that Harvard was investing much of its General Operating Account—essentially the cash on hand used to cover the school’s bills—alongside its endowment. Invested in a separate account but still managed by the Harvard Management Company—the entity that looks after the school’s $26 billion endowment—the university was looking for growth above and beyond traditional money market returns for this cash pool.


“We were invested fairly heavily with them and that’s what led to the losses,” Harvard’s Chief Financial Officer, Daniel Shore, said in an interview with The Boston Globe. “The problem, as much as anything, was we weren’t as diversified as we could have been.”


Harvard’s real-estate portfolio also suffered substantial losses, upward of 50%, according to the report.

The report can be found here .




To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

As Europe Regulates, Study Shows Pensions Could Be Losers

 

A study by Charles River Associates states that European pensions could see limited investment options and weaker returns due to the draft directive on alternative asset management.

 

(October 22, 2009) – According to a recent report by Charles River Associates, European Union (EU) pension funds could be prohibited from investing in upwards of 40% of hedge funds and 35% of private equity funds if proposed regulations are approved.

 


The draft regulations under review would require greater capital bases and disclosure from all alternative managers who hoped to have European public pensions as limited partners. Critics worry that such regulations potentially could cut European pensions off from foreign hedge and private equity funds that were not in compliance with the directive. Under the draft directive, funds outside the EU could be promoted only within the EU if they complied with similar regulations, and if their country of incorporation had agreements with EU member states regarding the exchange of tax information.

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According to the report (prepared for the City of London regulator, the Financial Services Authority), the EU draft directive could cost pensions upward of US$2.1 billion each year. The total cost figure of US$2.1 billion comes from Charles River’s calculations that each fund could expect a 0.05% decline in returns per year based on this imposed “home-region bias.” The draft directive also will impose large one-off costs on alternative managers, the report says.

 


The directive, first issued in May, is being worked on by EU regulators, with the latest draft expected to be released by the end of the year. The British Government—which collects billions in tax revenues from the hedge fund and private equity industry—has been a vocal opponent of the EU proposal.



To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

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