This post covers a theme I’ve discussed on many occasions over the past several years, namely how “alternative asset managers” are making enormous sums of money by ripping off public pensions as well as college endowments. Send this to anyone who naively tells you we live in a meritocracy. The sad truth of the matter, is we operate within an economy which incentivizes all of the worst types of behavior, where people can earn millions of dollars a year while failing.
Don’t believe me? Read the following excerpts from a recently published piece in The Chronicle of Higher Education, How Colleges Lost Billions to Hedge Funds in 2016:
A peculiar thing happened in 2016. While the Dow Jones industrial average grew by more than 13 percent, college endowments saw nearly a negative 2 percent rate of return. The worst endowment performance took place at the nation’s wealthiest private institutions. Harvard’s endowment alone shrank by $2 billion, a 5-percent decline. Out of the 40 biggest endowments, 35 declined in value.
What’s going on here?
A key factor is poor performance by the hedge-fund gurus that institutions have increasingly paid to manage their investment portfolios. Colleges have reason to be angry because hedge funds charge high fees even when they lose money. Colleges and universities spent an estimated $2.5 billion on fees for hedge funds in 2015 alone. They paid an estimated 60 cents to hedge funds for every dollar in investment returns between 2009 and 2015, according to a report by the Strong Economy for All Coalition. These fees helped each of the top five U.S. hedge-fund managers earn more than $1 billion in 2015 despite mixed performance.
Unfortunately, the disastrous endowment performance of 2016 disproportionately affects public colleges and less-wealthy private colleges, while leaving the most-elite private institutions with their wealth intact. The wealthiest colleges felt relatively little impact from their losses in 2016 because they have benefited from major endowment growth since 1977.
Starting in the 1970s, the wealthiest universities shifted from a conservative investment strategy centered around bonds to more aggressive investment in stocks and other equities. In the process, they created what amounted to in-house hedge funds. These funds are staffed by top investment managers who are paid millions of dollars annually. Under their stewardship, the eight colleges went from average annual investment returns of just 5 percent in the 1960s and 1970s to average annual gains of 10 percent from 1980 to 2010.
Without sufficient resources to establish their own in-house hedge funds, the rest of America’s colleges and universities have followed the lead of those elite eight by turning over increasing shares of their endowment portfolios to actual hedge funds. Back in 1981, just 15 percent of colleges with endowments were invested in venture capital funds, the forerunner to today’s hedge funds, according to the Nacubo Endowment Survey. Even by 1987, less than 1 percent of all endowment assets were invested in venture capital funds, with only one college investing more than 12.5 percent of its assets with venture capital. In contrast, by 2015, most colleges and over 20 percent of all college-endowment assets — more than $100 billion — were invested in hedge funds.
Endowment donations and wealth have meanwhile remained concentrated at the elite eight colleges and a handful of other wealthy institutions. Endowment growth has provided substantial surpluses at these institutions in part because they have mostly held undergraduate enrollments flat for the last 30 years. As a result, the wealthiest eight institutions were able to increase spending on university operations just from their endowments from $9,574 per student in 1977 to over $60,000 per student in recent years. This helps to explain a new finding from the Stanford economist Raj Chetty that 38 top private colleges enroll more students from the top 1 percent of the U.S. income spectrum than from the bottom 60 percent combined.
That last statistic is mind-boggling, and further demonstrates the sad reality that, far from a meritocracy, America is rapidly becoming a caste society where whatever socioeconomic group you are born into is likely where you’ll remain for the rest of your life. This realization is fueling so much of the very understandable anger and frustration throughout the land.
For related posts, see:
Additional Details Emerge on How Hedge Funds and Private Equity Firms Loot Public Pensions
“Let Them Sell Their Summer Homes” – NYC’s Largest Public Pension to Ditch Hedge Funds
SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior
Additional Details Emerge on How Hedge Funds and Private Equity Firms Loot Public Pensions
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In Liberty,
Michael Krieger
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It is time to fight back. Make the student loan dischargeable in the bankruptcy court. I need all the help I can get. Please help my petition.
You can view and sign the petition here:
https://petitions.whitehouse.gov/petition/repeal-11-usc-ss-523a8
Here’s some more information about this petition:
Repeal 11 USC § 523(a)(8)
The economics of higher education are in crisis: tuitions are soaring,
with increases in college and school costs outpacing inflation students are exiting college and graduate school more indebted than ever hastransformed student loans into the largest source of consumer indebtednessafter mortgages. To make matters worse, all of this comes as the value of higher education is being called into question. With returns sinking and tuitions, indebtedness, and defaults surging, the need for higher education financial reform is pressing. Students are unlikely to be able to repay, and § 523(a)(8) of the Bankruptcy Code exacerbates the effects of such burdensome debt by allowing private and federal student loans to be discharged only upon a showing of “Undue Hardship.” Please sign this petition.
“The sad truth of the matter, is we operate within an economy which incentivizes all of the worst types of behavior”
When they sentenced Michael Milken to 3 years in a country club prison called Maxwell where he only served 1-1/2 years of the sentence and had conjugal visits from his wife every other weekend while walking with $300 million in ill gotten gains, it was over. Milken was banned from the Securities business for life. Yet now he’s a billionaire.
That’s when I left the Securities business, and I told my father at the time that “They just a sent a very loud and clear message to every dishonest little cheesedick shithead in an Ivy League business school. The message is, crime does pay, and I don’t want to have any part of it”.
They did not fail to disappoint.
I really can’t say I feel sorry for Harvard. 🙂
Couldn’t these schools can’t find an alumnus working in the business who would manage their portfolios on the up an up out of school loyalty? Rich jerks are always donating tons of money to get their names put on campus buildings 50 years after they graduated, so there must be someone out there willing to do it for the ol’ alma mater.
The educational system is broken. No one actually cares about getting an education to help them perform better at there job. Now a days they just want to be entitled. The diploma says they are entitled to earn more money. Companies look past abilities and just look at degrees when deciding salaries. Its all a big joke. It comes from greedy and power hungry people that are not satisfied with what they have. No matter how much they have they just want more. Nobody takes pride in just trying to make the world a better place anymore.