How endowments spend tuition payments

By Felix Salmon
September 15, 2009
Michael Hennessy provides a really good one. Even he, however, admits that many endowments went way too far during the boom years:

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If you want a defense of the endowment style of investing, Michael Hennessy provides a really good one. Even he, however, admits that many endowments went way too far during the boom years:

Some (not all) endowments were far too aggressive with their private assets programs, sometimes to the point of planning on incoming charitable contributions (and even seasonal tuition payments) to help fund private asset capital commitments and private capital calls in a “just-in-time” fashion.

Using tuition payments to make capital calls from private-equity funds? I know that people have described Harvard as a large hedge fund with a small educational institution attached, but this is just insane. As a public service, Hennessy should start naming names.

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2 comments so far

If I, the University, went out and told people that
a) They should give me $100,000/year for four years
b) I would, in return, give them a brilliant education
then – you know – it may not be such a bad deal.

But, If I, the University went out and told the same people that
a) They should give me $100,000/year for four years
b) I would, in return, invest the money however I saw fit
c) I would use any profits from these investing activities to fund their education to the best of my ability (depending, of course, on the profits)
then – you know – the uptake might be slightly different. Truth in advertising, but quite probably not quite as effective.

At the end of the day, what every crazy high-flyer there is trying to do is
a) Get “not so large” sums of money from large numbers of people on a recurring basis (paychecks, tuition, whatever)
b) Tell them that they are getting on thing for their money (“We will keep your money safe”. “We will give you an education”)
c) Invest this money in some high-risk high-reward venture (Complex interest rate swaps, CMBS, etc. Strangely enough, they *all* invested in the same set of goofy complex ventures)
d) Hope that the music doesnt stop, or if it does, it happens much later when you are gone.

I wonder who else was doing this. Somehow I don’t think it stops at Universities and Banks. There *must* be more…

I’ll not name any names, but suffice it to say that these referenced universities still all have outstanding long time real and risk-adjusted returns, even including 2008. The real egregious flaw was banking on donations into their institutions to help provide liquidity. Tuition payments are fairly predictable and, after all, contractual obligations, albeit ones experiencing more deliquencies and defaults than normal.

Indeed most endowment investment operations should be communicated in a fully transparent way, and most are. And indeed they should be used, and are used, as a selling point to prospective donors and students alike. And that has historically been a very good thing because they have by and large done a superb job, leading to much more money for programs, tuition aid, etc. How that money is divvied and spent is an entirely different matter, and decided by the governing bodies of those institutions, and informed by faculty and administration primarily and the educational marketplace (which has become a misguided arms race, as most arms races are). But again, being down 25% in the worst financial crisis in our lives = what the 70/30 did. What model of investing will produce the best returns over the next 10 years?

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