Good usage of marginal dollars is one of EA principles. Of course you can argue that those principles are wrong, but it’s makes no sense to expect the EA community to defend people who don’t follow their principles.
And also that Harvard has demonstrated the ability to manage its endowment well.
Endowments are managed with long-term time horizons. Therefore, cherry picking one year of endowment performance and generalizing investment skill from it is misleading and inaccurate.
Also, percentage gains and losses are a more appropriate metric to use when comparing investment skill between managers. Otherwise, a large endowment will seem riskier than a small one, even if the two endowment allocations are identical.
They can “have a low use for” in the sense that they get little immediate gain, yet they can have “good usage” in the sense that the total utils created is large because they retain the capital and the capital continues to provide utility for a long time.
Rates of util acquisition matter. Time integrals also matter. But the most common thing for invested money to do is not to grow ad-infinitum, resulting in its owner owning half the planet after 100 years, but instead to eventually go completely bust in some or other speculative bubble.
A rational market only has a finite need for capital. Attempt to invest beyond that need, attempt to supply capital beyond the demand for it, and you will run into problems.
But the most common thing for invested money to do is not to grow ad-infinitum
Yes, correct, so? Would you take this to mean one should not invest one’s money?
A rational market only has a finite need for capital.
This is true. However I feel that dealing in aggregates is misleading: what matters is not really how much capital in total is available, but rather how it is distributed (aka available to whom). It is possible to invest capital successfully, it is also possible to waste it.
I would guess that a hedgefund billionaire has more skill in investing capital than people who manage the Harvard endowment fund.
If investing that money is good, he can invest the money directly. Yes, there are tax benefits involved in given to Harvard but those shouldn’t drive the decision.
I would guess that a hedgefund billionaire has more skill in investing capital than people who manage the Harvard endowment fund.
The difference isn’t skill. A manager of a hedge fund doesn’t have much in the way of leverage; the manager of Harvard’s endowment has a direct line to the admissions office, which can be traded for information that can generate high returns.
I bet it implicitly is. X gives useful advice to a Harvard investment manager, and a few years later the investment manager recommends X’s son to Harvard’s admissions office. Think of Harvard as mainly a hedge fund, and ask yourself if it is in its self-interest to do this?
People who want to buy their kids Harvard admission just do it directly: you give Harvard $X million and the admissions office accepts your kid (usually).
Think a bit: what kind of a useful advice can one give to managers of a $36 billion fund? That some company is about to be taken over? They don’t care. There is not enough liquidity in the market for them to buy enough of the target stock to move their needle.
Very large funds are peculiar creatures: their freedom of action is severely constrained by their size and their investment choices largely boil down to slow drifts in asset class allocations.
Oh, and the characterization of Harvard (all Ivies, actually) as an investment business with a very minor sideline in higher education is common and even, ahem, traditional :-)
My knowledge of high finance is theoretical so this might be wrong but is $36 billion really that much compared to the size of the world’s financial markets Harvard gets to play in? Yes, knowledge of one takeover wouldn’t allow them to double their endowment, but knowledge of, say, ten material non-public events a year could let Harvard earn a significant above market return.
is $36 billion really that much compared to the size of the world’s financial markets
The whole market, not much, so if a fund of that size wants to shift its asset class allocaton and, say, sell a few billions of bonds and buy a variety of global equity instead, it can do this. But if, instead, it wants to buy a particular security, it can’t buy much relative to its own size. Liquidity constraints are very real at this size.
$1m profit is less than 1⁄3 of a basis point of return for a $36B fund. It’s just not worth the bother, especially given how insider trading is illegal in the US.
That some company is about to be taken over? They don’t care.
But by this reasoning, they also do not care about a $5M cash gift to get someone off the waitlist. If I know that my company is going to put in an offer for another company at 20% above the current trading price, that info is worth $5M if you have and can move $25M without raising any concerns. If anything, the larger a fund, the easier is it to make adjustments like that to take advantage of insider info without it appearing suspicious. (“Yeah, we bought $25M of that stock the day before the buyout offer was announced, but it was as part of $700M of rebalancing, because we like to adjust 2% of our total portfolio every month.”)
But by this reasoning, they also do not care about a $5M cash gift to get someone off the waitlist.
Correct. The endowment managers absolutely don’t care about a $5m cash gift. It’s the admissions office which cares because it’s a part of that minor side line in higher education and doesn’t have free access to all those billions.
that info is worth $5M
Assuming an average return somewhere in the 8-10% area, the endowment generates each year $3-3.5 billion. Why risk an SEC investigation, a potential prosecution, a hit to reputation, etc. for a mere $5m which is about the rounding error in financial statements?
In general, I would recommend learning to distinguish between reality and caricatures drawn by enemies. It would seem to be… rational :-)
Because the SEC wouldn’t dare go after Harvard. And even if some prosecutor at the SEC who didn’t get the memo decided to start something, it would get covered up. The issue is that Harvard has more moral authority then the SEC.
Good usage of marginal dollars is one of EA principles. Of course you can argue that those principles are wrong, but it’s makes no sense to expect the EA community to defend people who don’t follow their principles.
They lost 8 billion of it in 2008.
Harvard’s endowment has performed exceptionally well. Here’s the data: http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf
Endowments are managed with long-term time horizons. Therefore, cherry picking one year of endowment performance and generalizing investment skill from it is misleading and inaccurate.
Also, percentage gains and losses are a more appropriate metric to use when comparing investment skill between managers. Otherwise, a large endowment will seem riskier than a small one, even if the two endowment allocations are identical.
They can “have a low use for” in the sense that they get little immediate gain, yet they can have “good usage” in the sense that the total utils created is large because they retain the capital and the capital continues to provide utility for a long time.
Rates of util acquisition matter. Time integrals also matter. But the most common thing for invested money to do is not to grow ad-infinitum, resulting in its owner owning half the planet after 100 years, but instead to eventually go completely bust in some or other speculative bubble.
A rational market only has a finite need for capital. Attempt to invest beyond that need, attempt to supply capital beyond the demand for it, and you will run into problems.
Yes, correct, so? Would you take this to mean one should not invest one’s money?
This is true. However I feel that dealing in aggregates is misleading: what matters is not really how much capital in total is available, but rather how it is distributed (aka available to whom). It is possible to invest capital successfully, it is also possible to waste it.
I would guess that a hedgefund billionaire has more skill in investing capital than people who manage the Harvard endowment fund.
If investing that money is good, he can invest the money directly. Yes, there are tax benefits involved in given to Harvard but those shouldn’t drive the decision.
The difference isn’t skill. A manager of a hedge fund doesn’t have much in the way of leverage; the manager of Harvard’s endowment has a direct line to the admissions office, which can be traded for information that can generate high returns.
Um. Are you suggesting that admission to Harvard is traded for stock tips? That is idiocy.
I bet it implicitly is. X gives useful advice to a Harvard investment manager, and a few years later the investment manager recommends X’s son to Harvard’s admissions office. Think of Harvard as mainly a hedge fund, and ask yourself if it is in its self-interest to do this?
I bet it is not.
People who want to buy their kids Harvard admission just do it directly: you give Harvard $X million and the admissions office accepts your kid (usually).
Think a bit: what kind of a useful advice can one give to managers of a $36 billion fund? That some company is about to be taken over? They don’t care. There is not enough liquidity in the market for them to buy enough of the target stock to move their needle.
Very large funds are peculiar creatures: their freedom of action is severely constrained by their size and their investment choices largely boil down to slow drifts in asset class allocations.
Oh, and the characterization of Harvard (all Ivies, actually) as an investment business with a very minor sideline in higher education is common and even, ahem, traditional :-)
My knowledge of high finance is theoretical so this might be wrong but is $36 billion really that much compared to the size of the world’s financial markets Harvard gets to play in? Yes, knowledge of one takeover wouldn’t allow them to double their endowment, but knowledge of, say, ten material non-public events a year could let Harvard earn a significant above market return.
The whole market, not much, so if a fund of that size wants to shift its asset class allocaton and, say, sell a few billions of bonds and buy a variety of global equity instead, it can do this. But if, instead, it wants to buy a particular security, it can’t buy much relative to its own size. Liquidity constraints are very real at this size.
$1m profit is less than 1⁄3 of a basis point of return for a $36B fund. It’s just not worth the bother, especially given how insider trading is illegal in the US.
And the need for coordination between the admission office and the endowment manager that might leave a paper trial.
But by this reasoning, they also do not care about a $5M cash gift to get someone off the waitlist. If I know that my company is going to put in an offer for another company at 20% above the current trading price, that info is worth $5M if you have and can move $25M without raising any concerns. If anything, the larger a fund, the easier is it to make adjustments like that to take advantage of insider info without it appearing suspicious. (“Yeah, we bought $25M of that stock the day before the buyout offer was announced, but it was as part of $700M of rebalancing, because we like to adjust 2% of our total portfolio every month.”)
Correct. The endowment managers absolutely don’t care about a $5m cash gift. It’s the admissions office which cares because it’s a part of that minor side line in higher education and doesn’t have free access to all those billions.
Assuming an average return somewhere in the 8-10% area, the endowment generates each year $3-3.5 billion. Why risk an SEC investigation, a potential prosecution, a hit to reputation, etc. for a mere $5m which is about the rounding error in financial statements?
In general, I would recommend learning to distinguish between reality and caricatures drawn by enemies. It would seem to be… rational :-)
Because the SEC wouldn’t dare go after Harvard. And even if some prosecutor at the SEC who didn’t get the memo decided to start something, it would get covered up. The issue is that Harvard has more moral authority then the SEC.
And on which basis do make such a confident pronouncement?