Taking a closer look at Harvard’s alts gains

As Harvard Management Company (HMC) reported a return of 7.3% for the 12 months ending June 30, private equity and hedge funds, which comprise nearly 60% of the $41.9 billion portfolio, played a significant part in these results.

Public equities, which make up less of the overall Harvard portfolio than hedge funds at $7.9 billion, had the best performance of any other asset class, with gains of 12.2%.

The outperformance of Harvard’s public markets position, which is essentially a $23 billion combined public equities and hedge funds portfolio, has been strong over the last two years. HMC CEO Narv Narvekar characterized the public markets segment performance in his memo this week to the Harvard community as “very good, albeit not excellent.”

“Furthermore, this strong manager performance has been critical in helping to offset HMC’s lower exposure to venture capital, a high-risk/high-reward investment strategy,” Narvekar said.

HMC manages the largest U.S. university endowment and has continued to grow its hedge fund allocation, up by about $1.2 billion from 2019. Hedge funds now make up the largest slice of the portfolio pie at 36.4%, compared with 33% a year ago, when HMC reported returns of 6.5%.

Harvard’s hedge fund program is the largest of the U.S. university endowments, surpassing the fellow Ivy League universities of Yale, Princeton and Columbia.

Unlike other university endowments, Harvard historically has also allocated to spin-off hedge funds from former staffers, and has even had access to offerings and input from its alumni, including legendary hedge fund managers such as Citadel founder Ken Griffin, and Ray Dalio, founder of Bridgewater, the world’s largest hedge fund group.

Harvard’s $15.2 billion hedge fund portfolio was a top performer, returning 7.9%, beating 2019’s gains of 5.5%. In 2018, the slimmer $8.2 billion hedge fund program saw performance gains of 6%.

Private equity strategies gained 11.6% over the same timeframe. As part of an ongoing portfolio transition, the HMC team has been reducing illiquid exposure outside of the historically strong-performing private equity portfolio.

The team’s goal over the next two fiscal years is to remove legacy assets that do not have the ability to generate returns commensurate with the risk and illiquidity they entail. These assets now make up a small percentage of the portfolio and are now in the lower single digit range.

Yale University’s endowment, which returned 6.8% in FY2020, is also looking to limit its exposure to illiquid assets (venture capital, leveraged buyouts, real estate and natural resources) to 50% of the portfolio.

The Harvard endowment’s other real assets, real estate and natural resources all had negative performance for the year, with the smaller $544 million real assets portfolio reporting a double-digit drawdown of more than -17%.

Natural resources were also down 6.2% for the year. But HMC recently spun-out its natural resources team into an independent firm — Solum Partners. They also sold off a 50% interest in a collection of agricultural assets to another third-party investor. Solum is expected to manage this portfolio and ultimately liquidate some of the natural resource assets in a bid to continue to right-size the endowment’s exposure to natural resources.

“Simply put, it is a tradeoff between higher returns and more long-term growth in the endowment versus having a less volatile University budget,” said Narvekar. “This remains a critical and complex collaboration with the University, one that is well under way and will guide future portfolio construction.”

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