Saturday, February 21, 2009

Endowment Director Is on Harvard’s Hot Seat -

What goes up, sometimes goes down too!

Endowment Director Is on Harvard’s Hot Seat -
"....the endowment is on the verge of posting its biggest loss in 40 years. With much of its money tied up for the long term, it is scrambling to meet some obligations.

Harvard has frozen salaries for faculty and nonunion staff members, and offered early retirement to 1,600 employee.....

[Years ago] Lawrence H. Summers, then Harvard’s president, had raised the possibility of locking in interest rates that appeared to be at historic lows, a plan the university adopted....All went well at first. But in the second half of last year, interest rates plummeted, and Harvard turned to the endowment to meet hefty collateral calls, which could rise to $1 billion if rates remain weak....

The endowment was squeezed partly because it had invested more than its assets, a leveraging strategy that can magnify results, both good and bad. It also had invested heavily in private equity and related deals, which not only lock up existing cash but require investors to put up more capital over time. "
Now the overall portfolio loss (21%) really is not bad, so I am not sure what the hullabaloo is, but from a teaching perspective, seeing that cash needs must be accounted for and planned for is a valuable lesson (as is the effects of leverage).

SIMM is looking better and better!

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