How Hedge Funds Loot College Endowments
Hedge funds are back in the news for for paying more than $1 billion each to the top 10 hedge fund executives in 2015 despite mixed performance.
This reminds me that I’m overdue to review a great new report from Hedge Clippers about how hedge funds loot college endowments for private profit. Hedge Clippers is a coalition that includes the New York affiliates of the AFL-CIO, American Federation of Teachers, Citizen Action, SEIU, and others.
The report finds that hedge funds charged more than $2.5 billion in fees in 2015 for managing about $100 billion of the $500 billion in total U.S. college endowment assets. The report further details how hedge fund performance in managing endowment investments faired no better than major indices for overall market performance.
I particularly like that report details how the highest allocations of endowment assets to hedge fund investments is at public and less elite non-profit schools. This suggests that schools with larger and more diverse enrollments may particularly lose scarce resources to hedge funds. Barnard, Trinity, and Smith colleges all allocated more than 60 percent of endowment assets to hedge fund investments. The University of Maryland system allocated more than 50 percent of assets to hedge fund investments. Michigan State, Oklahoma State, SUNY Stoneybrook, University of Illinois, and UCLA all allocated more than 40 percent of assets to hedge fund investments.
The report also nicely shows conflicts of interest whereby hedge fund managers contribute to universities that then retain their firms to manage endowment investments. In the process, hedge fund managers can be added to university governing boards. As we show in “Swapping Our Future“, the increasing presence and power of financiers on university governing boards contributes to a financialization of governance. Decisions on how many students to enroll and how much to spend on instruction are then made on the basis of how to maximize returns from university resource allocations rather than on the basis of educational or social goals.
Overall, the report adds financial intermediary costs as an important dimension for how financialization distributes costs and returns unevenly. We outline this framework for thinking about financialization in “The Financialization of U.S. Higher Education“. In the case of higher education, increased resources from endowment investment returns are highly concentrated at the wealthiest private colleges. Most students and colleges, however, were burdened by increasing financing costs. This occurred as state funding cuts pushed state and community colleges to rely increasingly on tuition revenue financed by student loans. Equity investors meanwhile extracted massive profits from for-profit colleges. All told, these financing costs increased from $21 billion in 2003 to $48 billion in 2012 (in 2012 constant dollars — equivalent to an increase from 5% to 9% of all higher education spending). In contrast, annual college operations funding from endowments rose from just $16 billion to $20 billion during that period (essentially flat as a share of all higher education spending).
Because of Hedge Clippers, we now have the solid estimate of $2.5 billion dollars in hedge fund fees for as an additional financing cost for endowments. If hedge fund fees were comparable in 2012, that means that higher education financing costs actually topped $50 billion or nearly 10 percent of all higher education spending.
Recent scholarship and journalism on financialization and higher education inequality, however, is aiding a series of new initiatives to steer endowment resources toward funding improvement and expansions of public colleges and universities. State and federal lawmakers have proposed new taxes on the wealthiest college endowments to help fund public education. A Connecticut initiative to tax Yale’s endowment has a particularly strong chance to set a powerful precedent. We have already seen the pendulum begin to swing back against student loans with a raft of Obama administration administrative actions to reduce interest costs and crack-down on for-profit colleges. The tide may also soon turn for endowments and the hedge funds which pillage them.