Last Friday was a quiet milestone in the history of Harvard University’s growth from a small college endowed with little more than the estate of a puritan minister to the rich and powerful academic force it is today. But unlike other important moments in Harvard’s history, there was no pomp and circumstance surrounding this one—only Jack R. Meyer, the man who oversaw the more than five fold growth of Harvard’s riches in just 15 years, walking out of Harvard Management Company’s (HMC) Boston offices for the final time.
Meyer’s departure is not an isolated event—HMC has been hemorrhaging talent as of late. Meyer took 30 of HMC’s roughly 175 employees with him, and his departure is just the latest in a slew of departures by top managers. The exodus has been spurred by both the high level of scrutiny that HMC faces and the fact that the private sector pays better. Both of these factors have been aggravated in recent years by alumni pressure led by seven members of the Class of 1969 who were outraged that some years a few top managers were paid in excess of $30 million. In light of Meyer’s departure, one thing is now clear: if Harvard is to see its amazing returns continue, these alumni must stop calling for salary cuts for HMC’s employees and stop the excessive scrutiny that has made it less attractive to work for HMC.
It’s not hard to deduce that Harvard is having a tough time finding a replacement for Meyer. The process has gone on for 10 months and nobody has been found, leading to a rocky transition durring which Peter A. Nadosy ’68 has temporarily taken over while Meyer & Co. are acting as advisers. Additionally, several news sources have reported that a variety of people have turned down the Harvard job. Although University treasurer and HMC board chair James F. Rothenberg ’68 said the process of finding Meyer’s successor is moving along, he did tell The Crimson that “people recognize that taking this position will put you a little bit in a fishbowl.” In other words, the scrutiny that the top job at HMC comes with has turned away top talent. And that doesn’t even take into account the pay cut anyone moving from the private sector to HMC would take.
To understand why compensation is so important, one needn’t look further than where all of HMC’s departing employees are headed: Convexity Capital Management, a hedge fund set to launch in 2006. Lucrative hedge funds usually get a “two and twenty” cut—two percent of the amount invested in the fund goes to management fees every year plus 20 percent of the returns. For a $25.9 billion dollar hedge fund that grew at 19.2 percent last year—the equivalent of Harvard’s endowment—that would amount to almost half a billion dollars in management fees plus almost a billion dollars of Harvard’s nearly five billion dollar profit.
Compared to this alternative, the price that Harvard pays for HMC to manage the endowment looks like a steal. In fact, Meyer told The Crimson that, for last year’s compensation, Harvard paid out a base fee of .26% plus incentives (positive or negative) on the nearly half of Harvard’s endowment that HMC manages. Given the disparity between the market rate and HMC’s rate—the first nearly double the second, according to Meyer—alumni have no basis for complaining about the salaries paid to HMC’s top talent. Indeed, Harvard should be ready to pay HMC employees even more if that’s what it takes to attract talented managers.
But alumni still complain because Harvard’s non-profit status makes the salaries of HMC’s top brass public. If Harvard managed externally, these prices would be out of sight and out of mind for alumni but not the University’s financial administration. Alumni who lack the information possessed by those making the decisions should resist the temptation to get angry at headlines that blare that “top fund managers net $100 million in fiscal year 2003 payouts” and instead take into account the hidden costs that endowment managers have to consider.
Keeping part of the endowment internally managed is important not just because of savings on management fees. A “hybrid” endowment—one managed both internally and externally—allows Harvard to reap returns from areas that endowments piecemealed out to hedge funds can’t touch. Harvard can also make moral decisions with its internal money, like it did last year when the Harvard Corporation directed HMC to divest from PetroChina. By speaking out against “high” salaries at HMC, members of the Class of 1969 are effectively calling for external management of Harvard’s endowment. This, in turn, would strip Harvard of all control, moral and otherwise, over its money.
Harvard’s endowment is the nest egg in which the school’s future lies. No matter how one thinks the endowment should be spent, it is only logical to want the endowment to grow at its fullest potential—a potential that can only be reached with high levels of compensation and reduced alumni scrutiny. Alumni should realize what is in the best interests of the University and bite their tongues while the University replenishes HMC’s depleted talent pool—even if doing so carries a high price tag.