Harvard University Endowment Case Study
HarvardUniversity Endowment Case Study
HarvardUniversity Endowment Case Study
QuestionOne: Structure of Organizational Management
TheHarvard University Endowment has a hybrid model of management. Itelicits to help both external and internal administration teams. Thegroup justifies their choice by claiming that it allows them to getthe best of both areas. A chief executive officer is in charge of theorganization and is assisted by a chief operating officer, chieffinance officer, and a chief technical officer (Mendillo, 2009).Other members of the leadership body include the head of external andthat of internal management. The company also has some people whooversee investments in fixed income markets, equity arbitrage, realestate, and internally managed funds.
QuestionTwo: Economic and Market Conditions in 2007-2009
Theyears between 2007 and 2009 were characterized by a weak economy andvolatile market climate. The bankruptcy of the Lehman brothers led toa financial crisis in the United States. The recession created acredit freeze that made it difficult to access monetary aid such asloans (Mendillo, 2009). The interest rates on existing liabilitiesalso rose significantly. Aside from that, investments, especially inexotic financial instruments such as derivatives, were devalued. Assuch, the returns went low or stopped flowing due to variousinstitutions and individuals. Consequently, investors withdrew theirfunds from ventures to save themselves from acquiring huge losses.
QuestionThree: Performance of the Endowment Investment
Theperformance of investments of Harvard University Endowment was belowaverage. The value of the venture registered a negative revenue in2009 since it dropped by over thirty percent. Its inability to accesscredit and the devaluation of its investments led to the stalling ofits projects. Although it could not take on new investments such asbuilding a science complex in Allston, the poor financial statusnecessitated departmental cuts. It also led to a 3.5 percent increasein tuition fee for the 2009-2010 academic year (Allen, 2009).Furthermore, it was the first time the forum underperformed due to aneconomic crisis.
QuestionFour: Inefficiencies That led to Underperformance of the Endowment
Notably,a poor investment tactic caused the failure of the Harvard UniversityEndowment. In the past, the institution had maintained low risk fixedassets that offered steady cash flows even in times of crisis. Assuch, it had managed to survive all prior recessions, and themanagement had changed this tactic. Besides, only about sixteenpercent of their assets were in the form of fixed income securities.The firm had taken up exotic financial instruments such asderivatives (Allen, 2009). Though such tools have high rewards, theymay be subject to high risks. Aside from that, they over-invested inthese properties, which led to huge debts. When the market crashed,the interest rates due on the obligations rose to percentages thatcould not be repaid by the collapsing fund. Lastly, bad bets oninterest rate swaps as well as the high operational costs accruedmade their financial status worse.
QuestionFive: Feasible Solutions
Adoptinga cautious asset management plan could correct the economic tragedyfaced by the Harvard University Endowment. The institution shoulddiversify its portfolio to reduce unnecessary risk (Lee, 2017). Thespread of funds across various asset classes may improve thereliability of outcomes and lower transaction costs. The fund shouldalso come up with techniques to cut its operational costs, which willincrease its gross margin. Most importantly, it should invest amajority of its capital in low-risk ventures such as fixed incomesecurities. The shift in the financial markets has opened up numerousopportunities in the sectors. Lastly, the organization shouldmaintain liquid asset classes that provide access to money whenneeded. The investment in illiquid properties denied the access tocash flows during the recession, thus leaving it in debt.
Allen,C. (2009). How Harvard should handle its endowment. Forbes.Retrieved fromhttps://www.forbes.com/2009/02/27/harvard-endowment-depression-opinions-contributors_harvard.html
Lee,M. (2017). Do alternatives have arole in global diversified portfolios?Dimensional Fund Advisors LP.
Mendillo,J. L. (2009). Harvard Management Company endowment report: Messagefrom the CEO. HarvardManagement Company.
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