The office managing Harvard University’s $35.7 billion endowment will undergo a major shake-up this year with the layoff of over 100 employees, almost half its staff.
Early Wednesday afternoon, the Harvard Crimson reported that the Harvard Management Company — the team managing the nation’s largest endowment — announced that budget cuts would be made by the end of fiscal year 2017 in June. The move marks a significant shift away from the unique model that has defined HMC for decades, pushing it toward the model currently used by the Yale Investments Office and many others, according to finance experts.
Yale’s investment model differs most significantly from Harvard’s in its near total reliance on external managers, a model that allows the Yale Investments Office to maintain a relatively small internal staff of 30 people compared to Harvard’s current 230. The HMC’s model has been known and criticized for its high staff compensation since Jack Meyer established HMC’s investment model in the 1990s.
According to William Jarvis ’77, executive director of the institutional investment firm Commonfund Institute, there are not many internally managed investment strategies like Harvard’s. University of Richmond, for example, is one of approximately 20 American universities that still maintain internally managed hedge funds, though Harvard contains by far the biggest internal operation, Jarvis said.
Harvard does not rely entirely on internal investments, however. Its strategy has been called a “hybrid model” for its marriage of internal and external managers, a framework that HMC has gradually developed over the past decade, according to School of Management professor Roger Ibbotson.
Under its hybrid model, Harvard saw disappointing investment returns in the 2016 fiscal year. Though the HMC website says that there has been more than a 10 percent average annual return rate over the past 20 years, their returns last year fell to negative 2 percent, which contributed to an overall drop in the endowment’s value by nearly $2 billion. For the same period, Yale saw a positive investment return of 3.4 percent.
Other Ivy League institutions have tried to replicate Yale’s model, developed primarily by Chief Investment Officer David Swensen and YIO Senior Director Dean Takahashi. Among Swensen’s proteges are many endowment managers across higher education, including Andrew Golden SOM ’89 at Princeton, Rob Wallace ’02 at Stanford and Peter Ammon at the University of Pennsylvania.
Harvard’s move away from a hybrid model comes after a recent shift in leadership within HMC. Last month, N.P. Narvekar, from the Columbia University Investment Management Company, replaced then-president and CEO Stephen Blyth, who joined Harvard in early 2015 but resigned after taking a medical leave of absence in summer of 2016. Swensen, meanwhile, is now in his 32nd year of managing Yale’s endowment.
Narvekar brings to HMC an investment strategy that is closely aligned with Swensen’s approach of utilizing external managers, according to Jarvis. As the manager of Columbia’s endowment, Narvekar focused on producing not the highest returns but rather the lowest losses — “losing as little as possible when the market goes down,” Jarvis said. Such risk management would ultimately lead to a compounding effect in the long run.
Though Yale’s endowment has seen great success in recent years — it has grown by $7 billion in the past decade alone — there are advantages to internal management models like Harvard’s, Ibbotson said. Externally managed offices have to pay fees to the investment firms they use, while internal models only need to worry about employee salaries, which are often less expensive than external fees.
Nevertheless, internal management also has its disadvantages, Ibbotson noted. Chief among them is inflexibility, since internal management involves one fixed group of staff investors. An externally managed system, meanwhile, can more easily adapt to changing financial situations by cutting off ties with some investment partners and forming ties with others, according to Ibbotson. He added that tensions between a school’s faculty and its internal managers can arise if returns are not healthy, as internal managers often get paid more than faculty members.
Though HMC’s decision to downsize its internal operations by half is certainly a move toward Yale’s model, Ibbotson said Harvard has a long way to go before they begin to see the returns Yale has seen under Swensen.
“It’s not so easy to copy Yale. Yale has built up a lot of relationships over time,” Ibbotson said. “I’m not saying that Harvard can now do what Yale does.”
The Yale Investments Office is located at 55 Whitney Ave.
Correction, Jan. 26: A previous version of this article incorrectly identified School of Management professor Roger Ibbotson as Robert Ibbotson.
Correction, Jan. 27: A previous version of this article incorrectly stated that the University of Virginia has internally managed hedge funds. In fact, it does not.