After announcing her departure from Harvard University’s endowment, investment head Jane Mendillo will not be moving to a hedge fund but rather might enjoy semi retirement dabbling in music, education and non profits, she said in a Wall Street Journal article.

Jane Mendillo Endowment

Endowment posted an annualized return of 1.7%

In five years ending June 30 of 2013, Forbes notes the endowment posted an annualized return of 1.7%.  Problem is that is the worst among the ivy league, according to New York Times report.

On the surface, that performance isn’t the type that would inspire hedge fund investors to throw money like rose petals when Mendillo walks.  But underneath might lie a more complex story.  In short, Mendillo might have been called in to clean up a derivatives mess made by previous occupants.

From 2001 to 2006 Larry Summers was president of Harvard University, fresh off a stint deregulating derivatives and ousting former CFTC Chairwoman Brooksley Born. During this period of time Summers laid a foundation of unregulated derivatives exposure in interest rates that cost the university $1.8 billion. Odd for a guy who at one point was slated to manage interest rates at the US Federal Reserve.

Mohamed El-Erian and Larry Summers both liked derivatives

The derivatives exposure was said to have residual hold over that remained even after Summers left in 2006.  Mohamed El-Erian, head of the endowment’s investment unit, took over from the legendary Jack Meyer and stayed at the firm until 2007.  He and Summers both liked derivatives, although El-Erian had the good sense to trade the regulated variety.  Nonetheless, many of El-Erian’s complex positions, including significant tail risk hedges, were an unwanted legacy that Mendillo wanted to unwind.

But Mendillo had bad timing, taking the job in the July of 2008.  Surly she was aware of the derivatives crisis, which was the buzz of Wall Street and derivatives circles at that time.  Bear Sterns had imploded under the weight of excessive unregulated derivatives nearly a year earlier, just after Treasury Secretary Hank Paulson gave a warning to the Bush Administration about the coming derivatives implosion. Talk among professional investors was starting to race that the unthinkable might happen: The big banks that benefited from such complexity just might fail in the wake of their derivatives.  Those in the derivatives industry knew the significance of these unregulated time bombs and attempts to defuse them, by the likes of Brooksley Born and others, fell on deaf ears and were unsuccessful.

Mendillo at wrong time and place with wrong derivatives positions

Then in the fall of 2008, just five short months after being named responsible for a complex web of derivatives positions, the house of cards came tumbling down and the stock market crashed. Mendillo was in the wrong place at the wrong time with the wrong derivatives exposure.

After this event track record bruising event, Mendillo pledged to make investing simpler at the endowment.  To her credit, she was handed a mess from her predecessors, much like the current Federal Reserve chief Janet Yellen. The time bomb Mendillo was handed exploded before she had time to unwrap the packaging.  At least with Yellen she is being given time to unwind the artificial mess created in a fast money world.

In a year ending June 30, 2013 the endowment returned 11.3 percent, slightly under the national average of 11.7 percent for colleges and universities measured in a study.

It’s unclear what Harvard intends to do with nearly a $30 billion endowment, as they could pay for everyone to go to school for free from here to as far as the eye can see.