(May 24, 2010) — According to a new report, Harvard and five other New England institutions of higher education took on too much risk during the economic crisis, fueling the crisis in the region and affirming the endowment model of investment is “broken.”

The 81-page report indicated that Harvard’s losses reflect how terribly wrong the endowment model can go when pushed to certain extremes in a climate of leadership crisis. The endowment model is an investments style pioneered by Yale chief investment officer David Swenson that relies heavily on diversification into the so-called illiquidity premium provided by alternative asset classes.

“While much attention is rightly being paid to the role of for-profit financial institutions in provoking the recent financial crisis in the weakly regulated shadow banking system, the role of nonprofit institutional investors in heightening risk in the capital markets requires much closer scrutiny as well,” said Dr. Joshua Humphreys, the lead author of the report and senior associate and director of the Center for Social Philanthropy at Tellus Institute in Boston. “The data we analyze in the report make clear that the Endowment Model of Investing is broken and needs to be greatly overhauled. Endowments need to become much more resilient to market volatility, and colleges should reclaim their historical role as nonprofit stewards of sustainability, both in their investments and in their local economies.”

Together, Harvard, Dartmouth College, Massachusetts Institute of Technology, Boston College, Boston University and Brandeis University suffered investment losses that resulted in delays and cutbacks in construction projects that will drain at least $1.35 billion from local economies over the next three years, the report noted.

For example, from June 2008 to June 2009, Harvard, the richest U.S. college, saw its endowment drop 30% to $26 billion. The university was forced to fire workers, freeze pay, and cut budgets. It also shelved an ambitious plan to expand the campus into Allston.

According to the Boston Globe, Humphreys said large money pools of money like Harvard’s provided capital to Wall Street for derivatives and other toxic investments that helped topple the financial markets. He aimed his attack on the boards of the biggest endowments. “These people are desensitized to the risks that they take in their lives every day,’’ he said. “Their mandate is to take oversized risk.’’ However, he offered some praise for the smaller Boston College endowment, which invests largely in assets that can be easily bought and sold, such as stocks and bonds as opposed to less liquid hedge funds, private equity, and other alternative investments. He said: “It’s not a coincidence that BC hasn’t fired anybody, because half their portfolio is liquid. That has afforded them a level of resilience that has allowed them to continue to fulfill their mission.’’

The study was conducted by the Tellus Institute and the Center for Social Philanthropy, two nonprofit organizations, and was funded in part by the Service Employees International Union, which represents employees at schools including Harvard.