IN THE HOUSE

For Harvard, internal management skirts the problems of securing enough high-quality outsiders to handle the endowment, and also provides for greater control over risks, more effective financing, and more efficient use of capital, Meyer says.

But Harvard’s internal system is not without its headaches.

By July 2004, five fund managers had left HMC in six years to strike out on their own.

Along with the constant threat of losing managers to better-paid positions at outside hedge funds, in-house endowment management at Harvard is “enormously complicated,” Meyer says, requiring an operations staff that is much more sophisticated than the average hedge fund.

“People look in at the endowment portfolio, and it’s a little scary from the outside because there are a lot of complicated strategies going on,” Meyer says.

Another factor that may have drawn away managers from HMC is the visibility of Harvard’s endowment. Because it is owned by a nonprofit, HMC must report the salaries of its highest-paid employees, so the details of top managers’ compensation are openly available.

Public knowledge of compensation has bothered many top managers at HMC, according to Meyer. This stands in stark contrast to private investment firms, where compensation is not disclosed.

And while higher, and confidential, pay scales can be found outside of HMC—“I don’t think anyone has left because we’ve paid them too much,” Meyer jokes—he says that the opportunity to start one’s own firm, rather than greater compensation, is the chief reason for managers’ departures.

The financial environment of the early 1990s provided HMC with a natural advantage in attracting managers. At the time, it was difficult to raise money and get the structure in place to start a hedge fund, so managers leapt at the opportunity to develop a track record at HMC, Meyer says.

And to many fund managers, Harvard’s endowment was more than just another hedge fund.

“People worked at Harvard Management because they felt that causing Harvard endowment assets to grow was a noble pursuit,” says Byron R. Wien ’54, a managing director and senior investment strategist at Morgan Stanley. “It was a great way to spend your life.”

But since then, the environment has changed, and it is much easier for new firms to raise capital today. As a result, some managers have left to start their own funds.

After nearly 13 years at HMC, Larson says he “felt that I had one more challenge left in my life for what I wanted to do. Now’s the time to hang out my own shingle.”

HMC has further incentivized the departure of its fund managers by supporting those who strike out on their own: roughly a quarter of the current endowment is invested by outside managers who “spun out” of HMC.