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The University Endowment

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As a public school kid all the way through and now a public university teacher, I am a bit resentful of how all the media attention for higher education focuses on the same elite institutions where all the reporters attended college. What a meritocracy we have in America! Despite this though, one thing that is true is that the obsession with the endowment at elite private colleges is far outstripping their actual mission for education. Why, it’s almost as if once you decide to run a university like a business, the same vultures who control private capital and have created the New Gilded Age do the same thing to the universities!

It is rarely, if ever, discussed how endowment fund management is an integral part of the budget problem. As the tax filings of virtually every private college or university show, enormous investment management fees are pouring out of nearly every substantial endowment and into the pockets of fund managers. Most of these fund managers are not university employees, but rather work for industries such as private equity, hedge funds, and other so-called “alternative” investments. According to its tax filings, Oberlin College (my alma mater) paid out a total of $14,872,522 in investment management fees between 2013 and 2017, averaging around $3 million per year. During that same period, Amherst College paid out $186,601,258. At both colleges, investment management fees actually exceeded reported profits from investments several times. Excluding Harvard (which manages its roughly $41 billion endowment internally and has also faced criticism for immensely high overheads), the remaining Ivy League colleges reported paying out $241,653,279 in fees in 2017 alone. That same year, Stanford University paid out $47,901,005, and Johns Hopkins $28,112,000. The list goes on and on.

As enormous as such figures are, it is likely that they do not represent the total costs associated with these investments. Tax filings simply do not reveal enough for the overall financial effects of these investment decisions and practices to be comprehensively assessed. But what is known is that the alternative-investment industry is tremendously profitable: In 2020 alone, for example, the top 15 hedge fund managers collectively made over $23 billion.

But we can say that the pattern reflects a widespread institutional practice with endowments, tax-free investments held by nonprofit institutions that provide education as a public good. Increasingly, endowments are invested in expensive, secretive, unregulated, illiquid, risky, and hard-to-value financial instruments—the strategy laid out by David Swensen in his book Pioneering Portfolio Management and nicknamed the “Yale Model.” While acknowledging the greater risks involved, Swensen credits Yale’s returns to this strategy, noting that “developing partnerships with extraordinary people” is the single most important element for its success. What makes these people extraordinary is not specified, but the enormous amounts of money they are paid does fit that description.

Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology. Very few institutions seem to balk at putting alumni and other donations into risky, illiquid investments, something that would have been regarded as foolish and dangerous only a few decades ago.

Sometimes in life, you get what you ask for. And that’s what is happening with these elite private schools in love with capitalism as an operating ideology. Welcome to the club fellas. Now you have a sense of what it’s like for the working stiff.

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