Wednesday, July 22, 2009

H is for Hedge Fund

“Were the judgments we made reasonable ones?” a former top Harvard administrator asked me, rhetorically, addressing the sharp increase in expenses and capital commitments of the last decade. “At the time, I think they were reasonable judgments. It turns out, with the benefit of hindsight, you might have preferred less ambitious plans.” (Which is not to say that the administrator in question accepts a grain of responsibility for those judgments.) ...

“Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh’s dream—you know, during the seven good years you save for the seven lean years,” remarked Alan Dershowitz, a professor at Harvard Law School since 1967. “And now they’re coming hat in hand, pleading to the faculty and students to bear the burden of cutbacks. It’s a scandal! It’s an absolute scandal, the way Harvard has handled this financial crisis.”

— Nina Munk, "Rich Harvard, Poor Harvard," Vanity Fair

At one point in her gripping account of the endowment train wreck and its aftermath at Harvard University, Nina Munk characterizes Harvard as "a distinguished, high-minded research university, arguably the greatest university in the nation." This is just the sort of a by-the-by assertion that makes Harvard partisans nod their heads and murmur "Of course" and the rest of us grind our teeth in various degrees of dismay, disbelief, and envy. Harvard itself makes no effort to dissuade people from this view, and its public mission seems to center around preserving and extending its reputation, legacy, and importance.

Which is why I am puzzled that Harvard has landed in the mess it has so loudly, sloppily, and apparently unexpectedly. You would think a university founded almost 375 years ago would take the long view in everything it does. You would think that it would be cautious, circumspect, and conservative, and that, in the words of that arch traditionalist, Rudyard Kipling, it would have learned to treat those two imposters, triumph and disaster, the same.

You would think that a mere setback of 25 or 30% in the endowment account—after years of outstanding, market-beating returns—would have been reserved for, or at least anticipated as theoretically possible. You would think that such a university would have made provisions for just such a rainy day. Apparently, you (and I) would be wrong.

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Of course, there are other contenders for the throne of greatest university in the world, some of which have the unbridled temerity to site themselves outside the United States. So I thought it would be instructive to conduct, investment banker style, a quick comparable analysis of the leading hedge fund universities in the US with the oldest English-speaking university in the world, Oxford. The comparison, if I say so myself, is revealing.

 Harvard Yale Oxford 1
Year founded 2163617011096/1167
Total students20,32011,44620,014
Total staff12,95012,7958,427
2008 FYE expenses (mm)$3,465$2,294£749
Staff costs as % of expenses47.9%58.4%53.8%
2008 FYE endowment (mm) 3$36,927$22,686£654
% Expenses funded by endowment34.7%37.1%4.5%
% Expenses funded by government 415.4%19.7%30.4%
Net fixed assets (mm)$4,951$3,200£844
2008 FYE capital spending (mm)$591$569£114

1 Oxford's numbers do not offer a true apples-to-apples comparison to its American rivals, since the vast majority of the University's residential colleges are independent financial entities whose numbers are not reported in the University's consolidated reports. However, one can get a sense of the size of the omitted entities by noting that the colleges had aggregate income of £267 million in fiscal 2008 and aggregate endowments totaling £2.67 billion.
2 Oxford states: "There is no clear date of foundation, but teaching existed at Oxford in some form in 1096 and developed rapidly from 1167, when Henry II banned English students from attending the University of Paris." Way to stick it to the French.
3 As of fiscal year end 2008, before everybody and their brother shit the bed. Current size estimates for Harvard's and Yale's endowments are $26 billion and $16 billion, respectively. No-one really cares how much Oxford's pissant little endowment lost since July 2008, except perhaps Oxford. It is worth noting that Oxford is currently undertaking an unprecedented capital campaign to raise—wait for it—another £1.25 billion. Woo-hoo!
4 The percent of last fiscal year expenses paid for with direct national government support and grants.

For one thing, the figures do little to persuade me that Yale pays much attention to the productivity of its labor force. More interesting, and more to the point, it appears that the oldest university manages to eke out its continuing reputation as one of the best around with a much smaller endowment than its competitors. Even adjusting for the unconsolidated endowments of Oxford's independent colleges, the University manages to educate over 20,000 students to some of the highest standards in the world using a mere $5 billion in treasure. Sure, Oxford relies on the UK (and, to a much lesser extent, the EU) government for a larger proportion of its operating expenses than the Yanks, but Harvard and Yale demonstrate no rugged go-it-alone individualism when it comes to Uncle Sam's largess. Again, adjusting for the Colleges' endowment income, it is not clear there is much difference at all.

So what's the difference? Cathedral building. Consider this, from Nina Munk:

Over the 20-year period from 1980 to 2000, Harvard University added nearly 3.2 million square feet of new space to its campus. But that’s nothing compared with the extravagance that followed. So far this decade, from 2000 through 2008, Harvard has added another 6.2 million square feet of new space, roughly equal to the total number of square feet occupied by the Pentagon. All across campus, one after another, new academic buildings have shot up. The price of these optimistic new projects: a breathtaking $4.3 billion.

In Allston, a Boston neighborhood just across the Charles River from the school’s main campus, you can view Harvard’s billion-dollar hole in the ground, a vast construction pit. It’s the foundation of Harvard’s most ambitious project of all: the sprawling Allston Science Complex, once scheduled to be completed by 2011 at a cost of $1.2 billion—but now on hold.

And this proud recitation, from Yale's fiscal 2008 report:

Capital spending on facilities in 2008 totaled $568.9 million. This represents a 52% increase over the 2007 spending level and the highest level of spending in the University’s history. This significant increase in capital spending reflects the University’s commitment to renovating its existing facilities while adding strategic new facilities to meet teaching, research, and residential needs.

The accompanying graph is a thing of beauty.

It seems that Harvard and Yale are in a race to determine which of them has the biggest edifice complex.

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This is Part 3 in a continuing series on the cost and funding of higher education in America.
Part 1: Et in Arcadia Ego
Part 2: VA • NI • TAS

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