liquidity issue that now has the Management Company reeling.
The endowment is expected to provide about 35% of the $4 billion
needed annually to run the university, covering costs such as
salaries, expansion, financial aid, and more. Normally, this is not
a problem; during an economic collapse, however, holding large
amounts of esoteric investments when no one is buying makes
this difficult. For an institution with large and recurring financial
commitments, illiquidity is a potentially fatal sickness.
That, however, was but the beginning. Besides creating potential
liquidity problems, the amplified diversification of the endowment
had another major impact on the university. Because abstruse
investments require specialization, Harvard soon began to look for
alternative asset savants. Determined to hire the best, HMC tried
and often succeeded in luring talent in-house. However, when
certain market and political conditions coincided, Meyer began to
see some of his best and brightest walking out the door.
Financial District, Boston
This is not the Boston that guidebooks write about. It is not the
North end, with its quaint 12-seat Italian restaurants that serve
underage college kids a bottle of wine if their dates are attractive
enough. It is not Beacon Hill, where the monied and cultural elite
of the city lodge. There are no bistros in the cement jungle of
downtown Boston; it is all gray and minimalist and efficient. And
it is here, at 600 Atlantic Avenue, that the Harvard Management
Company worked its magic, and where, a decade ago, Jack Meyer
started another trend that would alter the structure of HMC: the
accelerated outsourcing of its investment management.
One of the rarer features of the Harvard endowment is its hybrid
nature—a portion of the money is managed internally, while the rest
is invested with external managers. The benefit is clear: Have the
manager with the best track record investing your money, and you’re
likely to get the best returns, regardless of where they work. Under
Meyer, Harvard did just that. Instead of sticking to internal managers,
Harvard pursued the best investors wherever they were.
This outsourcing was not always purely by choice. Starting in 1998,
a string of managers began to leave Harvard for the outside world. If
the university wanted to retain the best talent, it had to be willing to
seed these managers with cash as they stepped out the door.
The first major departure occurred in April of that year, when
equities-specialist Jon Jacobson decided it was time to strike out
on his own. His migration—and those that followed—was partially
the result of Harvard’s rejection of a request by Meyer to allow
managers to work with outside funds, a move that would have
permitted them to receive additional compensation. Meyer had
proposed such a system in hopes of persuading talent to stay within
the fold but, when his suggestion was categorically rejected by the
university’s highest governing body, talent began to look elsewhere.
Jacobson, the brightest star within the Harvard constellation, quickly
started the Boston-based hedge fund Highfields Capital. To mitigate
the damage to its returns of losing its top manager, HMC handed
over $500 million in seed money as Jacobson stepped into his new
office atop the John Hancock building.
Within months of Jacobson’s departure, alternative investment
guru Michael eisenson and a large portion of his group departed
to start Charlesbank, a fund devoted to private equity and real
estate. Like Jacobson, they did not leave empty-handed; on top of
continuing to manage $1.4 billion in direct investments for Harvard,
they were seeded with $550 million in cash from the university.
A short time later, Timothy Peterson made a similar move,
decamping to start Regiment Capital. Two years of relative stability
followed, but it would not endure. In July 2001, the Select equity
Team, tasked with investing in domestic equities for HMC, left to
start Adage Capital Management. Headed by Robert Atchinson
and Phil Gross, this fledgling fund was also doused in Harvard
dollars—in this case, 1. 8 billion of them.
Yet, Meyer and Harvard, ever hard-bargaining, managed to finagle
money out of all the faithfully departed. On top of retaining the
investment expertise of teams known for crushing their respective
benchmarks, HMC negotiated revenue-sharing deals with all three
firms. In return for the large sums invested, Charlesbank agreed to
give 25% of its revenue to Harvard, while Adage agreed to cough
up 20%. Regiment also gave up an unspecified amount of its
revenue in return for seed money. Used to offset fees that Harvard
owed to the firms, these arrangements created the possibility that
other universities, attracted to the Ivy pedigrees of certain hedge
fund managers, might indirectly be paying Harvard to have their
endowment managed. Not a bad deal for the world’s richest
By seeding these start-ups, Harvard increasingly was looking
to outside managers to invest its funds. A decade prior, 85% of
endowment assets had been managed internally but, by the time
Adage was founded in 2001, that figure was down to 55%. The
HMC chief, it was clear, was intent on finding the best managers
he could. If it meant dismantling the internal structure that had long
defined Harvard, then so be it. Jack Meyer was not interested in
tradition. He was, however, interested in alpha.
As this search proceeded, a trend emerged. When the bull market
reigned, Harvard’s money managers would make haste for greener
pastures. When things in the outside world were uncomfortably
volatile or depressed, they stayed put. So, when the combination of
a bursting tech bubble and terrorist attacks dampened America’s
markets, some semblance of stability returned to the Harvard
Of course, long-term stability is elusive in the investment world.
Fortunately for the global economy, the downturn following
September 11, 2001, was a relatively brief one. For Harvard,
however, the recovery led once again to mass emigrations. First
to go was Jeff Larson and 17 of his fellow staff members. Their
creation, Sowood Capital, sprouted in March 2004 with a total of
$700 million from their initially sole investor and former employer.
The following year, David Scudder left to start Aureus Capital
Management after seven years at the helm of Trusts.
By this point, it was clear to most outside observers that it was not
only the American entrepreneurial spirit that was pushing managers