Harvard Wins

Remember Jack Meyer, the former manager of the Harvard endowment who left to form his own hedge fund, Convexity Capital? Last year, he was a zero, underperforming his benchmark, and Harvard was being peppered with questions about whether they still had $500 million invested with him. This year, he's a hero:

Convexity Capital, a $10 billion fund run by Jack Meyer, Harvard's former top investment manager, outperformed through option-related trades that tend to do well when volatility rises in the market. Mr. Meyer also scored gains anticipating the subprime-debt market implosion of the past year.

Overall, the Harvard endowment did extremely well this year, outperforming pretty much all its peers and actually rising in value by a few billion dollars despite a doomed investment in Sowood Capital Management and game of musical chairs at the top of its org chart. Clearly they're doing something right, and I don't understand this at all:

Compensation for Harvard's staff managers has been controversial. With the endowment's success, staff managers' paychecks have soared, sometimes into millions of dollars a year -- far more than the school's Nobel laureates or its deans get. Critics have argued that the university should outsource more of its asset management to save costs.

I hate it when newspaper articles cite anonymous "critics", you never know who they're talking about. It seems obvious to me that if the university outsourced its asset management, it would spend much more on fund-management costs than it does right now, not less. Paying "millions of dollars a year" is a veritable bargain when you're $35 billion in size: a flat 1.5% management fee on that would be over $500 million, while 2-and-20, on an 8% annual return, would be more than $1.25 billion. If they're getting away with an eight-figure annual payroll -- and I believe that they are -- then they're doing well.