Key Takeaways
- • Harvard's endowment nearly doubled its hedge fund allocation over two years ended June 2019, bringing total hedge fund holdings to $13 billion—now representing approximately one-third of the $39 billion endowment versus roughly one-quarter at Yale and Princeton.
- • CEO N.P. "Narv" Narvekar, hired in 2016 to improve lagging endowment performance, is making a contrarian bet on hedge funds precisely when institutional appetite is declining: one-third of U.S. endowments and foundations anticipate reducing hedge fund allocations in the current year.
- • The strategic shift reflects a broader operational overhaul at Harvard Management Co., including elimination of an in-house hedge fund trading desk, outsourcing of real estate management, and writeoffs of timberland and farm assets, while the organization cut 100 jobs and recruited investment professionals from Columbia and Penn.
- • Harvard Management's reorientation toward external hedge fund managers reverses the institution's historical model of in-house money management, positioning the endowment for potential outperformance during equity market downturns rather than in the prevailing bull market environment.
Summary
Harvard University's endowment is significantly increasing its exposure to hedge funds under the leadership of CEO N.P. "Narv" Narvekar, a strategic move that contrasts sharply with broader institutional trends in higher education. Over the two-year period ending June 2019, Harvard nearly doubled its hedge fund stake to $13 billion, bringing hedge funds to represent approximately one-third of its $39 billion endowment. This allocation now exceeds comparable positions at peer institutions, with hedge funds comprising roughly one-quarter of endowments at Yale and Princeton.
The escalated hedge fund allocation represents Narvekar's most significant investment decision since his 2016 appointment to revitalize endowment performance. His strategy runs counter to prevailing market sentiment: a recent survey by consultant NEPC found that one-third of U.S. endowments and foundations anticipate reducing hedge fund allocations in the current year. Hedge funds have faced persistent headwinds during the extended bull market, with uneven returns and elevated fee structures—typically 2 percent of assets and 20 percent of profits—prompting skepticism among institutional investors.
Narvekar's hedge fund positioning aligns with a deliberate portfolio repositioning aimed at the next market cycle. According to Laurence Siegel, former head of investment research at the Ford Foundation, "He's trying to position the portfolio for the next market cycle. Any good manager should be doing that." This thesis suggests potential outperformance during equity market stress, a departure from the advantage that low-cost index strategies have enjoyed during the current expansion.
The hedge fund expansion is embedded within a comprehensive operational restructuring of Harvard Management Co., Harvard's in-house investment management arm. Since Narvekar's arrival, the organization has streamlined operations significantly: eliminating an internal trading desk that employed hedge fund strategies, outsourcing its real estate team, and writing off timberland and farm assets. The restructuring resulted in 100 job reductions while simultaneously recruiting experienced investment professionals from Columbia and Penn to rebuild capabilities. This operational shift marks a strategic departure from Harvard's historical model of predominantly in-house money management, moving toward greater reliance on external, specialized hedge fund managers to execute the endowment's investment mandate.
The escalated hedge fund allocation represents Narvekar's most significant investment decision since his 2016 appointment to revitalize endowment performance. His strategy runs counter to prevailing market sentiment: a recent survey by consultant NEPC found that one-third of U.S. endowments and foundations anticipate reducing hedge fund allocations in the current year. Hedge funds have faced persistent headwinds during the extended bull market, with uneven returns and elevated fee structures—typically 2 percent of assets and 20 percent of profits—prompting skepticism among institutional investors.
Narvekar's hedge fund positioning aligns with a deliberate portfolio repositioning aimed at the next market cycle. According to Laurence Siegel, former head of investment research at the Ford Foundation, "He's trying to position the portfolio for the next market cycle. Any good manager should be doing that." This thesis suggests potential outperformance during equity market stress, a departure from the advantage that low-cost index strategies have enjoyed during the current expansion.
The hedge fund expansion is embedded within a comprehensive operational restructuring of Harvard Management Co., Harvard's in-house investment management arm. Since Narvekar's arrival, the organization has streamlined operations significantly: eliminating an internal trading desk that employed hedge fund strategies, outsourcing its real estate team, and writing off timberland and farm assets. The restructuring resulted in 100 job reductions while simultaneously recruiting experienced investment professionals from Columbia and Penn to rebuild capabilities. This operational shift marks a strategic departure from Harvard's historical model of predominantly in-house money management, moving toward greater reliance on external, specialized hedge fund managers to execute the endowment's investment mandate.
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