How Universities Manage Other People's Money

A high-profile philanthropist got in touch with me after reading my blog entry on the Harvard endowment yesterday. He made an excellent point about why would-be Harvard replicators are never going to be likely to achieve Harvard's returns: they don't have any access at all, let alone cheap access, to the very best alternative investments:

The reason Harvard and Yale and their handful of peers have such extraordinary returns is because they get into the BEST venture capital, private equity, and hedge funds. Try to just go into alternative assets as an asset class and you'll end up in mediocre funds and you'll get killed.

This is especially true of private equity, where a handful of well-known top shops account for substantially all the returns, but in general it's not a secret who the best alternative asset managers are. And no, you can't get in, but Harvard and Yale always can.

As for the reasons why Harvard and Yale don't manage alumni money, there were good ones (they'd risk their already-tenuous non-profit status), OK ones (managing more money makes their job harder -- but if they're earning 2-and-20 for that money they're being compensated, and Harvard's returns haven't fallen visibly as its endowment has increased), and slightly dubious ones (the endowments' need for illiquidity, which is real, but it's hardly as though they never pay out any cash: they do, every year, to their respective universities).

But it turns out that some endowments (I don't know which) are actually managing other people's money already. Under this plan, you give them money to invest, they invest it alongside their endowment -- and then, when you want to actually spend the money, you go ahead and do so, with the understanding that all redemptions go to registered charities rather than the donor's personal bank account.

The name for this is a "donor-advised fund", and it's a bit like a cheaper and easier version of a personal foundation. You donate the money today, and get the tax benefit today, but you don't need to actually do the legwork of working out where you want the money to go until tomorrow.

Some universities, it seems, are happy to run more money than they'll ultimately receive, just so long as they'll get a large chunk of that money (often half) themselves, eventually. Even so, says my correspondent,

the university is basically backing into managing alumni philanthropic assets even for money that ultimately doesn't end up donated to the university.

Does anybody knows of a specific university that's doing this? It seems like an interesting move.