Investing in hedge funds on campus

Harvard and Yale reported larger than usual returns on their multibillion dollar endowments this year. As of June 30, 2005, Harvard and Yale had 12% and 25% of their respective endowments set aside for alternative investments, namely hedge funds. That success has encouraged many of the nation’s biggest schools to follow the Ivy Leauge into hedge fund investment. Reed College in Portland, Ore., now has 58% of its endowment in hedge funds, up from 43.7% in June. Hobart and William Smith Colleges is at 54.7%, up from 51.6% in June.

Schools with endowments of $1 billion or more had an average of 21.7% in hedge funds in 2005, according to the nonprofit National Association of College & University Business Officers (NACUBO). But leading in percentages are some smaller schools, who are hedging even more agressivly than their larger, better known peers. Included are the College of Wooster in Wooster, Ohio, at 82.4%, and Yeshiva University in New York City, at 65.3%. Wooster is a small, liberal arts college in Ohio who has had rich rewards in the world of hedge fund management. Enabling them to be more competitive with faculty salaries, and allowing an increase in financial aid. Wooster has over 80% of the school’s endowment’s assets invested in hedge funds, recently causing their endowment to climb from $89 million in 1990, to $250 million today.

More than 8,800 hedge funds are curently operating in the U.S. with $1.2 trillion in assets. Hedge funds are expected to maintain their rapid growth by using agressive trading strategy in every imaginable asset class. But like all hedge funds, they impose limits on when investors can cash out. Many hedge funds only disclose what they’re buying and selling in general terms to shareholders, so assessing actual risk can be tough.

There are also some rising concerns toward this new trend, some endowments that have been trading in hedge funds are reconsidering. Oberlin College in Oberlin, Ohio, is one of them. “Hedge funds tend not to fully disclose their holdings, which exposes [investors] to some risk,” says Ron Watts, the college’s vice-president for finance. “That can make it challenging for us to fulfill our fiduciary responsibility.” On Apr. 1, Oberlin hired a consultant to review its policies. “We’re looking at reallocating money to areas we believe will be the future outperformers,” says chief investment officer Marcia Miller.

But it’s difficult to argue with the numbers. For the year that ended June 30, 2005, the dozen colleges with the most exposure to hedge funds earned from 6.7% to 15.6%, according to a BusinessWeek analysis of NACUBO data. All but one beat the Standard & Poor’s 500-stock index, which returned 7.4%.