Harvard Business School, part of America's Ivy League university, has built up a derivatives position that dwarfs the $20bn of California's Orange County when it was bankrupted last year.
With $35.3bn in outstanding positions, the US's second richest seat of learning (after Texas) can give even George Soros a run for his money.
The university uses its triple A credit rating to borrow cheaply. It then takes huge hedged positions to exploit small price anomalies in the world's stock and bond markets. According to Forbes magazine the university has been able to increase its wealth from $4.7bn in 1991 to $7.7bn in June this year by playing the derivatives markets and carefully controlling the risk.
Havard does play it safer than the typical hedge fund by refusing to speculate on interest rates and the relative value of currencies. It often uses derivatives as a way of reducing investment risk rather than enhancing returns.
Unlike other universities that farm out their investment management function, Harvard's is handled in-house through a wholly owned subsidiary run by Jack Meyer, a 50-year-old former graduate who blazed a trail at the Rockefeller Foundation. Key staff are paid a fortune with Jonathon Jacobson, vice- president for equity, picking up $3m last year. Robert Atchinson, vice- president for select equity, got $1.6m. Mr Meyer earned $1.2m.
A typical trade, according to Forbes, involved Harvard Management buying a blend of 10.75 per cent US Treasuries and zero coupon bonds, which had a comparable maturity and return to the standard eight-year Treasury bond. However, the package cost slightly less than the eight-year bond. And to capture the small discrepancy Harvard sold the eight-year bond short while going long on the blended equivalent. Hopefully, the value of the bonds converge and the position can be unwound at a profit.
Such an exercise would not normally net the hedger an enormous amount of money. So Harvard does these deals on a massive scale. In order to magnify the gains on a tiny spread the university took a $5bn position on the Treasuries' deal and expects to make $100m from the deal.
There are risks. A bond market crash could result in costly margin calls and the university pays millions of dollars in standby fees to banks world- wide to guard against the "doomsday scenario''.
Harvard has other problems as well. Sometimes it gets squeezed on its short positions when Wall Street finds out what it is doing. This can force the university to deliver stock it does not own, raising costs and eating into profits. But the university is known to be an aggressive litigator when its interests are threatened.
Harvard is not the only university looking to leverage more from its assets. Princeton has handed over part of its $4bn fund to Julian Robertson Tiger Management hedge funds. Brown's $720m endowment also makes use of hedge funds, while Yale specialises in venture capital, arbitrage and real estate.