Do you know who is managing your money?

I was speaking to the CIO of a large university endowment fund recently.

I have a very strong quant background, so numbers have been my life, for, well…my life.

During the conversation with the CIO, I asked him whether he uses performance attribution measurement products from either Barra or Northfield to determine the performance attribution of the various external investment managers engaged to manage the various asset classes.

He told me that he doesn’t, but has someone on staff whose entire job is to do this performance attribution computation. Since I have many years of experience designing, building, testing and interpreting the type of statistical equations required to systematically attribute performance, I was more than a little surprised. I’ve been spinning regression equations for over 30 years, so unless this “full time” person was doing that, which I doubt, then he was attributing performance via a spreadsheet.

I also asked him whether he planned do add these products in the future. He told me that he may look at it. In other words, I doubt it.

Here is my point.

Although the numbers have not been reported, I think the endowment lost about 30% or more last year – which is in line with other endowments across the country, so it doesn’t really stand out as abhorrently poor on a relative basis – even though the absolute number is very poor. In other words, when asked to explain his crappy performance to the University President, his reply will be, “Well, we did no worse than anyone else.”

Among other things, the endowment is used to fund the construction of new buildings as well as to fund scholarships and to employ people. Earlier this year, Harvard cancelled the construction of a new medical research building, graduate housing, parking and a Center for Government and International Studies. , significantly reduced the number of scholarships, and laid off employees. Harvard has also frozen employee salaries, slowed hiring, cut staff and offered other workers early retirement as part of a cost-cutting program to compensate for losses in its endowment. (see Forbes story on Harvard’s slump, entitled “How Harvard’s Investing SuperStars Failed”, February 20, 2009.

http://www.forbes.com/2009/02/20/harvard-endowment-failed-business_harvard.html

Bloomberg just published a story indicating that Harvard’s unwinding of interest rate swaps cost the Endowment Fund almost $500mm, and unwinding those positions cut significantly into its operating budget which led to the cutbacks described above.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHou7iMlBMN8

The press announcement from Harvard which detailed these cutbacks specifically pointed to the significant negative returns of the Harvard Endowment fund.

I’d be surprised to learn that the reaction was any different from the University President and administration staff at the College I was speaking.

The bottom line is that this endowment is valued at over $1.0 billion – and is managed entirely by external asset managers that specialize in various asset classes – Bonds, equities, real estate, etc. The attribution question comes down to the following: are those external managers managing to the strategy defined by the University, or are they simply reporting returns. A hedge fund will confidently say: “we are hedging beta.” However, no one ever asks them, “Which Beta?” Beta computed daily, computed, weekly, computed monthly, quarterly? Moreover, how does the Beta of the component return change over time, and how is the Beta being hedged based on the current market. A hedge fund may be hedging P/E, but in this market, mid-P/E needs to be hedged more than low P/E or high P/E.

It all makes a difference – are the managers being paid to do what they have told you they are doing, or what they are doing today to generate returns?

.....I can't believe it. This team is managing over 1 billion,...US Dollars, and they have no clue.