prone to being built on the flimsiest of ground and subject to sudden
sickness, would be handled going forward.
There’s a tradition at Wellesley College, the all-women’s school
located 15 miles outside Boston. On graduation day, the women of
Wellesley run a race rolling wooden hoops. The winner—who, as
lore has it, will be the first woman in the class to achieve success—is
given flowers and tossed into the sublime campus’ Lake Waban.
The tradition dates back to only 1974, when a daintily dressed
Harvard man infiltrated the ceremony. He won the race, his raid was
uncovered, and he was punished summarily with a dip in the pond.
When Jack Meyer began to outsource the
endowment’s management, larger fees to
managers were not the only consequence.
and issuing $2.1 billion in bonds, university officials were talking
openly of tightening their belts, taking a close look at hiring and
compensation, and bracing for more bad news ahead. Despite its
still-massive endowment, Harvard was searching for cash.
left impossibly exposed. All might have been reasonable actions at
the time—and they created immense profits for two decades—but
these decisions are at the root of the violent coughing fit Harvard is
This was not the last time Harvard raided Wellesley. Following
el-erian’s departure in January of 2008, Harvard decided to stay
close to home, making the decision to pluck endowment chief Jane
Mendillo from her lush surroundings in the Boston suburb and bring
her to 600 Atlantic Avenue. While Mendillo wrapped up her affairs at
the fund she had led since 2002, Robert Kaplan, former Goldman
Sachs vice chairman and Harvard Business School professor, ran
HMC on an interim basis. In July of 2008, Kaplan handed the reins to
Mendillo was no stranger to the Harvard endowment. She was
employed by HMC from 1987 until 2002, assuming a number of
positions that culminated in her appointment as vice president of
external Management in 1997. Upon her move to Wellesley, she
assumed control of $1 billion, turning it into $1.7 billion by 2008.
She constantly beat the school’s own Policy Portfolio, which made
her an enticing choice for the fund up the road. If nothing else,
her choice signaled that, despite the concerns regarding leverage
exposure wrought by the collapse of Sowood, HMC was not
changing its basic strategy. Unfortunately for Mendillo, however,
clouds were growing on the horizon just as she took control.
Fast forward a year, and Harvard is feeling the downpour. Mendillo
arrived a day after the end of Harvard’s fiscal year, one in which it
posted an 8.6% return, nearly 2% above its internal benchmark.
Considering the market volatility and recent management turnover,
this was no mean feat and, as would seem normal for a university
acquainted with perennial alpha-generation, expectations for
Mendillo’s start were high. However, by early December, on top
of initiating a fire sale of $1.5 billion in private equity holdings
The private equity sale in particular painted a startling picture for
Harvard. Reportedly hampered by lack of interested buyers, the sale
came within two months of an open letter touting the university’s
overlay strategy, intended to fend off extreme market events through
the use of futures contracts. The annual report from the fiscal year
ending in July 2008 practically bragged of the value added through
risk management procedures. HMC’s Web site, although usually
unhelpful, claims that it closely manages correlated risk factors.
None of this, in the end, stopped Harvard from catching the most
violent of colds. In echoes of Long-Term Capital Management,
overconfidence in its ability to manage risk may have caused
Harvard—and, indeed, many other investors—to forget that 100-year
storms have been happening at a decidedly quickened pace as of
late. Returns that were supposed to be in opposition were, all of a
sudden, correlated. Value-at-risk measurements, based on the belief
that markets are distributed normally, were rendered meaningless
when fat tails emerged and, instead of patting themselves on the
back as they had in the summer, Harvard was starting to sweat.
Little of this can be pinned on Mendillo. The risk controls and culture
in place were not hers, and the portfolio she inherited, for all the
logic of diversification, was uniquely ill-suited to survive such events.
Because Jack Meyer’s expansion into investment exotica came at
the cost of liquidity—something worth its weight in gold in such times
as these—Harvard has been unable to be the nimble player it would
like to be. Because of management turmoil seen at least in part as a
response to overheated internal debate regarding salaries, HMC has
been left with less institutional memory, less oversight over outside
managers, and more exposure to leverage. Because of Mohammed
el-erian’s reaction to Meyer’s departure—a swift and masterfully
ill-timed reduction in fixed-income investments—Harvard has been
While the Management Company originally claimed that there would
be no alteration to its internal workings, time and pressure have
caused them to stray from this course. In early February, the university
decided to cut up to 25% of HMC staff, a figure that reportedly
includes more than just back-office personnel. employees who
survive the purge are likely to stay; the fund—which, for years, has
had a serious and constant talent retention issue—almost always sees
stability in its staff when turmoil in the outside world abounds. As for
future investment strategy, Harvard will likely attempt a balancing act.
No longer can liquidity—the new black of 2009—be ignored. Cash
and fixed-income holdings will be stepped up, insiders say, but there
will be no abandonment of esoteric investments because of Harvard’s
cold, only a readjustment in its asset allocation model.
That’s the party line, at least, but, to the analytic eye, the party is
over. History, and Talese’s story, show that Sinatra got his voice
back; HMC never will. The extraordinary system that generated
extraordinary returns is finished, a victim of changing attitudes toward
risk. Like virtually every corporate pension fund, the recent crisis has
taught Harvard that discretion matters more than valor, and that the
institutional investment world has reached a new mutation—risk, no
matter how intelligently embraced, is only worth embracing on the
margin. The Harvard community, which in the end the endowment
serves, will not be forgiving if losses of such magnitude are seen
again and, thus, HMC in all likelihood will opt for consistency over
outperformance. Risks that were taken before—with startling success
until recently—will not be seen again at America’s largest university
endowment. The Harvard Management Company will retreat into the
pack, once more just one among equals. What set it apart for so long
has gone, and it left for good the moment the endowment caught its
current cold. n