Over at The American Prospect, they ask, “Are Endowments Damaging Colleges and Universities?“

That sounds nonsensical, but that is because the real question that they are asking is, “Is the path chosen by universities and colleges to rely on risky and extremely high fee strategies run by Wall Street big shots to increase returns on their endowments damaging colleges and universities?”

That answer is unequivocally yes, even if you are not as incompetent a steward of your college’s money as Larry Summers was at Harvard. 

The goal of the Wall Street big shots is to maximize their own personal gain, and by promising big and providing almost Byzantine complexity that shields them from oversight, they make bank, and the colleges get f%$#ed:

These are perilous times for private, nonprofit, independent higher education, and not just because of changing demographics, ever-climbing tuitions, and pandemic shutdowns. For years, education researchers have charged that institutions are unable to control costs effectively, especially their operating costs. In public discourse, colleges and universities are often characterized as reckless spenders. So when they slash academic budgets or cut staff, nearly everyone shrugs. Higher education has gradually accommodated itself to austerity thinking. But as any critic of neoliberalism can tell you, austerity is really just another way that money and resources are redistributed upward, and outward.

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.

………

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.

 As I have said here many times, “There is nothing that the finance industry cannot ruin.”