Ivy League way to rich harvest riches

SIMON PINCOMBE

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.

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
News
peopleLynda Bellingham's tragic final Loose Women appearance moves audience to tears
Arts and Entertainment
'Right Here' singer Jess Glynne is nominated for Best Newcomer at the MOBO Awards 2014
musicExclusive: Jess Glynne hits out at 'ridiculous' criticism of white artists nominated for Mobo Awards
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Separated at birth? Frank Sivero (left) claims The Simpsons based Mafia character Louie on his Goodfellas character
arts + entsFrank Sivero sues Simpsons studio over allegedly basing mobster character on Frank Carbone
News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

News
news

Voices
Stephanie first after her public appearance as a woman at Rad Fest 2014
voices

Arts and Entertainment
Laura Wood, winner of the Montegrappa Scholastic Prize for New Children’s Writing
books

Children's bookseller wins The Independent's new author search

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London