Endowment woes

Back in 2005, JLM and I blogged about the outrage at Harvard over the $7 million being paid to the head of investment management for their endowment, Jack Meyer. His performance-based pay required that Harvard profit enormously first, and Harvard did. JLM pointed out that average hedge fund managers were paid $251 million for similar services. Meyer left the endowment, Mohamed A. El-Erian took over for two years, and last July Jane Mendillo assumed the position of leadership. She was David Swenson's student at Yale--Swenson runs Yale's endowment, and is a favorite topic for JLM, for example here and here.

How's that been working out for Jane? Not so good, in these markets, per the New York Times.

Harvard's portfolio was hit hard by the Lehman bankruptcy, and it was leveraged, with a cash position of negative five percent. Plus Harvard had some ambitious expansion plans underway that needed cash at just the wrong time. As a result of these factors, Harvard is underperforming its peers.

Harvard has said its overall endowment portfolio declined 22 percent from July through October and that it could end the fiscal year in June down 30 percent. That performance is in line with the average for university endowments, though some have done better. Yale’s endowment was off 13.4 percent in the comparable four-month period, while Princeton’s was down 11 percent, and both have projected a total 25 percent drop for the fiscal year.

In order to raise urgently need cash, Mendillo had to sell some of her better performing assets, because no one would buy the dogs. What was it that went on the block? Among other things, an interest in a hedge fund with outstanding performance run by . . . wait for it . . . Jack Meyer. The same guy who did such a good job for Harvard that he got paid too much, and had to resign.

Do I think that hedge fund managers "deserved" their high pay? I believe I have nothing to say about it, I'm not hiring any. The unfettered market needs to set their pay, not me. I find the size of Harvard's tax-free endowment more shocking than the pay of its investment managers.

But it occurs to me that the Congress is taking substantially the same approach to banker compensation as Harvard did to its investment managers. I wonder why anyone thinks that is a good idea?