bloggingbuyouts

In the wake of the nation's subprime worries, Wall Street has over the past year tried to offload its risky mortgage-backed securities to just about anyone who showed an interest, including university endowments. Last month, it was reported that the top 53 university endowments, with assets of about $217 billion, have invested nearly 18% of their money in hedge funds. By contrast, the average pension fund has around 5% in hedge funds.

Today, The Wall Street Journal reported that Harvard University's endowment fund has lost about $350 million through its investment through Sowood Capital Management, a hedge fund founded by Jeffrey Larson and Stuart Porter. Larson managed Harvard's foreign stock holdings until 2004, and then left to start Sowood, which recently lost over half its $3 billion value through poor bond investments.

Harvard Management Company, manager of the university's endowment, has long been considered one of the nation's most successful investment management firms, with annualized returns of 15.2% over the past 10 years through 2006.

Their hedge fund strategy worked well in the past, especially during the period 2000-2002, when they generally outperformed other investments. Endowments, however, are late to the table this time. While $350 million is only a dent in Harvard's $29 billion endowment, it highlights the risks that colleges are taking in nontraditional investments like hedge funds and private equity. If even Harvard is making these mistakes, then I'm sure other universities need to take a serious look at what they are doing.