Harvard's Hard Lesson

It was reported in the Wall Street Journal today that Harvard University's endowment fund may be selling it's stake in 6 US focused real-estate funds for $500 million. According to the article, Harvard is under pressure to take this action, as the endowment fund does not have adequate cash to meet its obligations. The real estate portfolio lost 50% of it's value in the year that ended June 30, 2009.

To me, this is shocking. Harvard and certain other major universities have been acclaimed in the past decade for their aggressive positions in non-traditional investments and illiquid assets. Thus, they took great risk, with the goal of getting higher returns. However, they did not consider the downside risk of purchasing illiquid assets, which might be hard to sell. One would think that an institution such as Harvard, which has a huge endowment staff, would not make such a basic mistake. They did not anticipate the downside of their strategy and did not provide for adequate cash reserves.

For our clients, this is another reason why we have avoided hedge funds and other investments, which do not provide transparency and liquidity. We want to understand what we are investing in. We invest in mutual funds which can be sold and provide liquidity within days. Unlike Harvard, we have not invested in funds which require monies to be tied up for years, which could then result in liquidity problems.

To provide a sense of security, we plan upfront with our clients, to provide for adequate fixed income investments (we refer to this as the "foundation"), so that we are not forced to sell stock investments to generate cash, at fire sale prices.