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Paying Tuition to a Giant Hedge Fund
Harvard's academic mission is dwarfed by its $30 billion endowment.
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From its 1636 foundation Harvard had always ranked as America’s oldest and most prestigious college, even as it gradually grew in size and academic quality during the first three centuries of its existence. The widespread destruction brought about by the Second World War laid low its traditional European rivals, and not long after celebrating its third centennial, Harvard had become the world’s greatest university.

Harvard only improved its standing during the successful American postwar decades, and by its 350th anniversary in 1986 was almost universally recognized as the leader of the world’s academic community. But over the decade or two which followed, it quietly embarked upon a late-life career change, transforming itself into one of the world’s largest hedge funds, with some sort of school or college or something attached off to one side for tax reasons.

The numbers tell the story. Each September, Harvard’s 6,600 undergraduates begin their classes at the Ivy-covered walls of its traditional Cambridge campus owing annual tuition of around \$37,000 for the privilege, up from just \$13,000 in 1990. Thus, over the last two decades, total tuition income (in current dollars) has increased from about \$150 million to almost \$250 million, with a substantial fraction of this list-price amount being discounted in the form of the university’s own financial aid to the families of its less wealthy students.

Meanwhile, during most of these years, Harvard’s own endowment has annually grown by five or ten or even twenty times that figure, rendering net tuition from those thousands of students a mere financial bagatelle, having almost no impact on the university’s cash-flow or balance-sheet position. If all the students disappeared tomorrow—or were forced to pay double their current tuition—the impact would be negligible compared to the crucial fluctuations in the mortgage-derivatives market or the international cost-of-funds index.

A very similar conclusion may be drawn by examining the expense side of the university’s financial statement. Harvard’s Division of Arts and Sciences—the central core of academic activity—contains approximately 450 full professors, whose annual salaries tend to average the highest at any university in America. Each year, these hundreds of great scholars and teachers receive aggregate total pay of around \$85 million. But in fiscal 2004, just the five top managers of the Harvard endowment fund shared total compensation of \$78 million, an amount which was also roughly 100 times the salary of Harvard’s own president. These figures clearly demonstrate the relative importance accorded to the financial and academic sides of Harvard’s activities.

Unlike universities, the business model of large and aggressive hedge funds is notoriously volatile, and during the 2008 Financial Crisis, Harvard lost \$11 billion on its net holdings, teetering on the verge of bankruptcy as its highly illiquid assets could not easily be redeployed to cover hundreds of millions of dollars in ongoing capital commitments to various private equity funds. The desperate hedge fund—ahem, academic institution—was forced to borrow \$2.5 billion from the credit markets, lay off hundreds of university employees, and completely halt construction work on a huge expansion project, ultimately surviving and later recovering in much the same way as did Goldman Sachs or Citibank.

During all these untoward events, the dollars being paid in by physics majors and being paid out to professors of medieval French literature were of no significance whatsoever, and if institutional investors had balked at the massive bond sales, both groups might have arrived at the classroom one morning only to see a “Closed for Bankruptcy” notice, while Cerberus Capital Management and the Blackstone Group began furiously bidding for the liquidated real estate properties and private equity holdings of what had once been America’s most storied center of learning. Meanwhile, Bill Gates might have swooped in and acquired the unimportant educational properties themselves for a song, afterward renaming the campus itself Microsoft U.-East.

It is commendable that so many former students feel gratitude to their academic alma mater, but personal loyalty to a wealthy hedge fund is somewhat less warranted, and if Harvard’s residual and de minimis educational activities provide it with enormous tax advantages, perhaps those activities should be brought into greater alignment with benefit to our society. The typical private foundation is legally required to spend 5 percent of its assets on charitable activities, and with Harvard’s endowment now back over \$30 billion, that sum would come to around \$1.5 billion annually. This is many times the total amount of undergraduate tuition, which should obviously be eliminated, thereby removing a substantial financial barrier to enrollment or even application.

One of the major supposed reasons Harvard disproportionately admits the children of the wealthy or those of its alumni is the desperate need to maintain its educational quality by soliciting donations, and the endless irritations of fund-raising drives are an inevitable accompaniment to the reunion process. But the all-time record for a total alumni class contribution was set earlier this year by the Class of 1977 at just \$68.7 million, or about 0.2 percent of the existing endowment; and even the aggregate amount of annual alumni donations to support the college is quite trivial compared to the overall income and expenditure statement.

There is also the Internet gossip of an explicit “Harvard Price,” a specific donation dollar amount which would get your son or daughter admitted. The figure is said to be \$5 million these days for an applicant who is reasonably competitive and \$10 million for one who is not. Daniel Golden’s The Price of Admission provides a specific example which tends to generally confirm this disturbing belief.

But if such claims are true, then Harvard is following an absurd policy, selling off its good name and reputation for just pennies on the dollar, not least because the sums involved represent merely a day or two of its regular endowment income. Harvard surely ranks as the grandest academic name in the world, carrying a weight of prestige that could be leveraged to extract far greater revenue at far lower cost of academic dignity.

Suppose, for example, that instead of such surreptitious and penny-ante wheeling and dealing, Harvard simply auctioned off a single admissions slot each year to the highest blind bidder on the international markets. I suspect that the same sorts of individuals who currently pay \$50 million or \$100 million for a splotchy painting they can hang on their walls would surely be willing to spend a similar amount to have their son or daughter embossed with the Harvard stamp of approval. The key factor is that such prestige goods are almost entirely positional in value, with most of the benefit derived from the satisfaction of having outbid your rival Internet billionaires, oil sheikhs, or Russian oligarchs, so the higher the price goes, the more valuable the commodity becomes. And since the goal would be to extract as much money as possible from the wealthy bidders, a non-refundable bidding deposit of 2 percent or 5 percent, win or lose, might double or triple the total dollars raised.

Thus, instead of extracting steep net tuition from thousands of undergraduates (and perhaps quietly selling a handful of spots each year for a few million dollars each), Harvard could probably raise just as much revenue by enrolling a single under-qualified student in a process which would publicly establish the gigantic financial value contained in a Harvard diploma. It’s even quite likely that a useful side-benefit of the publicity would be a large rise in Harvard’s total applicants, including those of highest quality, as families all across the country and the world sought to obtain at zero cost the exact same product which a billionaire had just bought for \$70 million.

If Harvard wishes to retain its primary existence as a gigantic profit-maximizing hedge fund, that is well and good, but meanwhile perhaps it should be required to provide a free top quality college education to a few thousand deserving students as a minor community service.

Ron Unz is publisher of The American Conservative.

(Republished from The American Conservative by permission of author or representative)
• Category: Economics • Tags: Classic, Meritocracy 
The Meritocracy Series
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  1. Anonymous • Disclaimer says: • Website

    I’m rather overwhelmed after reading this and the associated article, about American educational meritocracy, or lack thereof. Ignoring the multitude of issues in this post regarding fairness, ethics, egalitarian opportunity and so forth, there was a single paragraph that was salient.

    Paraphrasing: Harvard University’s Division of Arts and Sciences has approx. 450 full professors, who are among the best compensated, on average, of any university in the U.S.A. Their total pay was approx. \$85 million (per year… fiscal year 2004?) Now follows the inexplicable, profoundly disheartening part:

    “…in fiscal 2004, the five top managers of the Harvard endowment fund shared total compensation of \$78 million, an amount which was [approx.] 100 times the salary of Harvard’s own president.”

    The author continues, saying that this clearly shows how much more important the endowment fund managers are to Harvard University than all academic and administrative roles. Obviously, the university is the raison d’etre for the endowment fund, not vice-versa. Thus there is no conceivable justification for the imbalances in compensation.

    If \$78 mil = 100 * (Harvard President salary) and \$78 mil = sum {fund mgr compensation(i)} for i = 1…5 then
    avg fund manager compensation = \$15,600,000 while
    Harvard president’s compensation = \$780,000 and
    avg full professor compensation = \$189,000
    This makes no sense at all! There is nothing unique about those 5 endowment fund managers that justifies the many multiples of compensation greater than the full professors and president! I recall that Lawrence Summers was president of Harvard in 2004 (or 2002, 2003?). He has a PhD in economics (from Harvard) and at that time, at least 25 years of remarkable achievement in econometrics, financial research, academic and supra-national agency experience, and other non-academic work. Similarly, the 450 full professors of Harvard University are among the very top experts in their fields of expertise in the world. Why do the directors of the university permit this? Why don’t the professors (and the huge number of important but less prominent university employees) protest?

    Often, conservatives are portrayed as being anti-intellectual, derisive of academia. Yet here I am, not in the comment section of The Chronicles of Higher Education, nor even Communications of the ACM. I am worried that America’s universities will no longer be the best in the world if resources continue to be so grievously mis-allocated.

    Thank you for this fine article; please forgive the excessive length of my comment.

  2. Anne says:

    My understanding was that Harvard began offering its generous financial aid packages because it was not donating enough to charitable activities. However, I was not aware that they were still under the amount required by law.

  3. John says:

    Ellie: if the endowment managers didn’t work at Harvard, they would likely have the chance to be similarly compensated at various investment management firms. The opportunity cost of the Harvard president and professors isn’t nearly so high.

    I’m not defending the Harvard model, but if you’re going to run yourself like a giant hedge fund, you need to pay people managing that money competitively.

  4. There are “market forces” – real if anti-social – which conribute to this imbalance. Many investment funds have enough money invested that they can AFFORD to pay managers such obscene salaries, and if the returns are good, consider it money well spent. Harvard has to compete with those salaries.

    One solution would be to tax all income over \$10 million at 100 percent, which means nobody would pay, or seek to be paid, more than that. It would also encourage reinvestment of profits, which reduces taxable net income.

    Another would be to amend the minimum wage laws to provide that the lowest paid employee will receive no less than one percent of the total compensation package of the highest paid. If you don’t want to pay the janitor \$700,000 a year, don’t pay the fund manager \$70 million.

  5. Punditius says:

    Private (and maybe public as well) universities seem to me to be the modern equivalent of medieval monasteries. They accumulate wealth with no obligation to pay taxes on it.

    Time to eliminate the tax free accumulation of money by these entities. Treat them like the profit- making corporations which they really are, and make them pay taxes.

  6. Harvard is over-rated. It is living off a reputation that it long ago lost the right to have. The massive financial meltdown was created almost entirely by ivy league graduates. They came up with Mortgage derivatives. They are not nearly as clever as they think they are, and there is a serious lack of morality amongst their graduates.

  7. Anonymous • Disclaimer says:

    I am one of those members of the Class of 1968 who do not contribute to the College nor go to the reunions or local Harvard Club meetings. The only Harvard organization that I belong to is the (rather small, as you might imagine) Harvard Veterans Alumni Organization.

  8. Dakarian says: • Website

    Wouldn’t this be the educational version of what happened to Banks.. and many other industries? As one person put it: “It’s more profitable to move about money than to do something with it”

    Btw, I don’t know enough about the whole practice, but why do I feel like there’s yet another house of cards in full form?

  9. Barry says:

    Sean, those guys were smart. They were also extremely destructive, and made sure that they got paid first.

    Ellie, as the article says, think of Harvard as a hedge fund with a university attached for tax and PR reasons. Then their behavior makes much more sense.

  10. Anonymous • Disclaimer says: • Website

    For a slightly deeper dive into the justices and injustices, if any, of elite college admissions, see the following:

    No Country for Young Children

    This, of course, is not really apposite to Mr. Unz’s remarks on the nature of Harvard as a giant hedge fund, but perhaps it offers an interesting supplemental perspective.

  11. Anonymous • Disclaimer says:

    Harvard is not a hedge fund; it’s merely a very, very rich university. Perhaps Unz thinks this is a problem, but I fail to understand why. The fact that it’s very rich doesn’t mean it’s not a really college, any more than Waltons being rich makes them not a really family.

    The fact that the university has been involved with increasing risky capital management plans in recent years is significant, yes, but that’s actually true of most wealthy private universities in recent years. They’ve been involved with risky capital management not because they suddenly decided to shift away from education and into finance; it’s just because the endowment fund is managed by endowment fund managers and these guys realized, correctly, that risky capital management yielded, over the long term, a greater return. They still do actual education and scholarship quite well.

  12. Tom says:

    I do not find any details of the actual rate of return on investment that these managers make. Do they “beat the market” or would Harvard be better off just buying index funds?

  13. Seth says:

    Obviously the auction suggestion is somewhat tongue and cheek, but it would be a massive failure. The reason wealthy people donate to get their kids into Harvards is so they can pretend as if their kids were just as smart as everyone else who is a student there. Explicitly auctioning off admission for someone otherwise not qualified would expose the charade and destroy the value of the admissions slot.

  14. Anonymous • Disclaimer says:

    The tale of Harvard being forced to borrow during the downturn reminds me somewhat of a particular retiree I knew who, having saved several millions over his career, was still highly leveraged in the stock market before the downturn. Afterwords, he was close to broke, and is trying to resume his career. He is of course angry at “the banks” for “undermining his investments”. He basically refuses to acknowledge that he took a risk and lost, and tells me I’m “leaving money on the table” when I tell him a quarter of my retirement funds are in Treasury bonds.

    My point is that the “financialization” of America has reached the point where almost everybody – retirees and Harvard – are chasing maximum returns without any purpose but “winning”, that is to say, having higher returns. While more money is always good, it’s not a purpose in itself, and needlessly accepting financial risk that jeopardizes ones purposes, simply to have more money, is the epitome of foolish.

  15. Anonymous • Disclaimer says:

    The largest Harvard reunion class gift is usually the 25th which is, using the skills I gained there, 1987.

  16. E says:

    There are many misleading points in this article.

    First, the author compares the tuition for undergrads to the amount of total endowment. Undergrads make up only 1/3 of the total student population, so this is the wrong comparison to make. I am pretty sure that average tuition (ex-financial aid grants) for law, business, and medical students is higher than for FAS undergrads.

    Second, the author mistakenly compares a stock (the endowment) to a flow (annual revenue). Yes, tuition makes up a very tiny percent of the endowment. However, from an annual operations standpoint, tuition makes up about 20% of annual operating income. The endowment contributes 35% of operating income by disbursing about 5-5.5% of net assets every year. So clearly tuition is still very relevant to the running of the university.

    So after the 55% of expenses from tuition and endowment, where does the rest come from? About 20% comes from the government, and 7% from current gifts (about 300mm). If you do the math, approximately the same amount of gift are applied to the endowment (about 1% of the endowment). Gifts to the university seem very important both from an operating standpoint and for ensuring the continual growth of the university.

    Moving onto pay. If you were to have \$30bb and put it into the lowest cost ETFs and mutual funds, your expense would be about 10bps/year = 30mm. A hedge fund with fees on the low end would charge at least 1% management = 300mm. So we are in the correct ballpark. It seems that over a 10yr+ period, the Harvard endowment has outperformed some reasonable benchmarks by about 2% annually. So total pay in this reason seems fine, if not conservative, by market standards (which you could certainly disagree with, but that’s another debate).

  17. Harvard’s indigenous view of running costs used to be a conservative one- ‘every tub on its own bottom!’

    Unfortunately, the last alumnus to serve as president, Nathan Pusey , stepped down in 1971.

  18. Hedge funds are not regulated by the SEC and that is a problem. When the economy tanks , there is the probability of dunking the investor in a cesspool. Harvard is basically defined as an accredited investor and all that implies, their not you average retiree trying to supplement their investment income.
    Hedge fund compensation can be percentage of asset valuation based or performance based. An investment adviser could even get compensation for capital gains if the portfolio sold securities that it holds,

    In a tanking economy investment firms will even accept much reduced fees . So how much did Harvard pay the firm in 2009, 20 basis points of portfolio valuation , 100 basis points or whatever……..

  19. I meant Harvard is not you average retiree trying to supplement their retirement income.

  20. Anonymous • Disclaimer says:

    There’s an old saying that money bends perception, which I would use to describe Harvard. Basically, this is a place that has an astronomical endowment, hence it should not ever need to borrow, do layoffs, etc. The fact that they did was because a desire to pursue outsized financial returns, hardly consistent with the mission of an elite university. And Harvard only started to ramp up scholarships when it appeared likely that the alternative would be the loss of the tax deduction for donations to the university. In short, Harvard may have the top professors, but the financial side runs the railroad. And yet this seems quite normal and proper at Harvard, which tells me that somehow the maximization of their endowment fund has been conflated to be synonymous with educating the best and brightest of America in the best way possible. If only that were true.

  21. I seem to recall that during Larry Summers’ tenure as Harvard’s president (?) he engaged in a set of derivatives transactions that wound up costing the endowment northwards of \$1 billion in losses. The arrogance of a man who, like most financial “wizards”, doesn’t really understand the risks and complexities of derivatives and structured products and who fails upward to lead the president’s economic council and then safely fails back to Harvard after completely misreading the severity of the crisis he helped engineer is symptomatic of American elites generally in this deeply corrupt gilded age. Harvard’s over-financialization mirrors the over-financialization of the nation as a whole. Money for public purpose has been lost in a deluge of money for casino speculation with hugely negative public purpose. The house of cards that collapsed in ’08 will collapse upon us once again within the next 5-10 years. But this time there will be no bottom, and either we will reinstate the walls that kept capital from over-flowing and unbalancing all sectors of the economy as we did in the 1930’s, reinstate public money’s dominance and purpose over private debt creation, build massive tax walls that inhibit “families” like the Waltons from controlling more money than the bottom 40% of the American populace, or we will reap the whirlwind and the high walls of the wealthy will provide no refuge from the starvation, death and violence that follows. Massive inequality is not compatible with democracy. There cannot be civil justice without economic justice. Neoliberal economic practice has brought us to the precipice: falsely promising broadly shared prosperity it has, by design, created the least equal conditions the world has ever seen. The threat of mass starvation caused the “Arab Spring”. The recent threats of mass starvation and food insecurity are the direct result of Goldman Sachs’ commodities markets “innovations” that allow them to bid up the world “price” of wheat, oil, etc., to make profitable their futures holdings, the bellies of the poor be damned. The engineered housing bubble that further enriched the already rich while decimating the middle and working classes, and the continued extraction of the national wealth by these same criminals will end, one way or another.

    And its Harvard’s (and the other “elite” institutions’) arrogant and poisonous elitism that has turned mass prosperity into mass destitution in 40 short years. The best and brightest are not to be found at Harvard. The spawning of a venal and corrupt “leadership” is Harvard’s legacy in the late stage capitalist hell we find ourselves in. If we are truly exceptional we will reverse course and repair the damage done. Either that or we will follow the course charted by every other empire in history and collapse under the weight of our own corruption.

  22. Rosell says:

    There does seem to be something to the idea that arrogant and corrupt leadership does not equate with being the best and brightest, since it tends to destroy the health of the overall community.

  23. Anonymous • Disclaimer says:

    This article points out the problem with most universities. They have become financial institutions and sports entertainment companies that happen to hold a few classes once in awhile so that they can still be called educational institutions. This is much like GMAC who, before the crash, was essentially was a financial services company that made cars once in awhile. On top of this, like GM, the universities are replete with bureaucratic bloat that has nothing to do with education. If it wasn’t for Pew Grants and people going into massive debt, these institutions couldn’t continue to increase tuition at a rate that has nothing to do with inflation or anything else. The current system is all about keeping highly paid bureaucrats, and professors that brainwash students about all sorts of nonsense, while charging ridiculous fees for the books,well paid. This situation could easily change. Internet education could impart knowledge to a broader range of people, much less expensively. But the truth is that these institutions don’t really care about education. They are afraid that their elitist status will be eroded and that the current scam they are benefitting from wil disappear

  24. Mike Conrad says: • Website

    Fun proposal, but in relation to this remark: “extracting steep net tuition from thousands of undergraduates” it’s worth noting that the top Ivy League schools and most of their competitors are extremely generous with financial aid. Such that they are a genuine bargain for middle-class and lower-class students. Only the relatively wealthy pay full freight.

    In this light, it could certainly be argued that tuition costs should increase even more than they have–in the interest of equity.

  25. Vooch says:

    One small bone to pick:

    Columbia was decidedly the premier US University until the 1930s.

  26. “Malcolm Gladwell mercilessly mocks John Paulson’s obscene \$400 million gift to Harvard” by Dylan Matthews on June 3, 2015

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