The Harvard Management Company, like the markets in which the endowment invests, has experienced cyclical performance behavior.  While the 12% returns that their asset managers have generated over the past 20 years is significantly above average, lately there has been trouble.

Harvard management poor performance

Harvard Management’s strong 20-year performance is largely due to Jack Meyer

Harvard Management had at one time thrived in the 1990s under the leadership of Jack Meyer, who operated the endowment for 15 years. He transformed the endowment into a hedge fund structure, hiring proprietary traders to work inside the firm rather than allocate money entirely to outside money managers. Though there were controversies, but the endowment nonetheless delivered market beating average returns of nearly 16% — and being causation for the 20 year 12% out performance trend the school cites.

After that former US Treasury Secretary Larry Summers took control and proceeded to lose $1.8 billion in a serious of complex derivatives trades, punctuating a low point in the endowment’s history. Harvard got back on track to various degrees but after consistently running near the top of the Ivy League investment return leader board, Harvard now finds itself trailing.

In 2015, for instance, the endowment returned 5.8%. While that beat the S&P 500, that wasn’t good enough. Harvard Management Company wasn’t “keeping up with the Joneses,” as the idiom goes. In 2015 MIT was up 13.2%, leading the pack. Princeton followed in a close second with 12.7% and Yale was up 11.5%.

Performance problems precedes top staff departures

In 2014 the endowment was criticized for compensation paid to its managers.  Being the low performer in the neighborhood didn’t sit well with Harvard University President Drew G. Faust in 2015, who then pointed at the Harvard Management CEO. “We obviously did not do as well as MIT and Yale and others, and that of course is a concern, and it’s very much a concern for Stephen Blyth, who has been making significant changes,” Faust told The Harvard Crimson.

Fast forward to Wednesday and it was Blyth who was stepping down. His hand-pick team of former Goldman Sachs executives Michael Ryan and Robert Howard and their new equity trading strategy that left the endowment as well, Bloomberg Briefs noted. The problem is performance. Traders in Ryan’s group were reported to have posted stock market losses so large that they triggered internal stop-loss orders and the portfolio Ryan managed also lost money.

The endowment is now turning to outside asset managers “who have the resources, skill and experience” to get the job done, Paul Finnegan, chairman of the endowment’s board and a co-founder of Madison Dearborn Partners in Chicago, a private equity firm, was quoted as saying. “HMC aims to be best in class in everything that we do and regularly evaluates how we can best allocate capital to achieve this objective.”

Quick transition raises questions

With the exit of Blyth as Harvard Management Company, the endowment is now on its sixth CEO since Myer left and a radical strategy change is was just undertaken. After stinging losses in derivatives and the current embarrassment of trailing Ivy League peers in performance for five years, the endowment rather quickly changed its approach, embracing outside managers.

“I’m really surprised they would dismantle it that quickly,” Verne Sedlacek, former chief financial officer of HMC, was quoted as saying. “That’s not a good sign for what the strategy is.”

Eschewing the in-house investment team was reported to have “shocked” Harvard Management employees. It was just last year Blyth informed staff that new investment strategies take years to be evaluated, Bloomberg reported, citing people close to the endowment. Further, the endowment had approved hiring researchers to support the group in 2016, but those plans now appear in question.

Perhaps now Harvard can focus on the plan to get noncorrelated.