Someone Else's Money

One lesson of this world financial crisis is that there has to be accountability when people are investing, well, let's use the real word, "playing" with, other people's money.

So far, after wildly successful gains, and now precipitous losses, there hasn't been any accountability.

There has been a lot of fooling around with other people's money. Not just your 401 k and mine, not just your pension fund, if you are lucky enough to have one, not just your money market.

How about your alma mater?

According to TheDailyBeast.com, in an article "The Man Who Gutted The Ivy League," written by Edward Jay Epstein, Yale's endowment has been managed by David Swensen since 1985. He changed the rules of endowment investment, even wrote a book about it, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, at first being wildly successful, and now, well, Yale doesn't know how much money it's lost.

The heart of his strategy was to reduce drastically the allocation for bonds, equities, and cash, and substitute for them a portfolio of illiquid investments that included participation in leveraged buyouts, hedge funds, and stockpiles of physical assets. Swensen argued in his book that such illiquid investments carry less risk and more potential for high returns than stocks or bonds. His case was that because endowment funds did not have to concern themselves with withdrawals for taxes or redemptions to their investors, they did not need the liquidity of the major stock and bond markets and could therefore avoid losses from short-term fluctuations.

Yale was the leader in moving endowment investment away from traditional blue chip investments and into the unregulated world of hedge funds, private equity, and physical asset acquisitions. The other ivy league and prestige schools followed suit. No one quite knows how much money they have lost, and in the letters to parents and alum, that figure is not mentioned. What is stated is that because of the losses, operating expenses have been slashed as services vanish. Tuition hikes are looming.

Epstein ends his piece: The real issue underlying the Swensen strategy is what the purpose of an endowment fund is. If it is to gamble on creating a jackpot large enough for a university to finance large-scale future expansion, his strategy may make sense, as it promises long-term profits. But if its purpose is to assure an institution’s continuity in bad as well as good times, the strategy may be inappropriate, especially if in times of crises, when other money raising is diminished, a university may have to borrow enormous sums to meet capital calls from private-equity houses. Unfortunately, such considerations of purpose tend to be drowned out by the alluring, sweet-sounding tune of a pied piper.