June 11 (Bloomberg) -- The Spence School, one of six exclusive New York City private schools to carry debt on its books, was downgraded by Moody’s Investors Service because it has too much money in a hedge fund.

Moody’s lowered Spence’s $15.3 million of municipal bonds by one level last month to A1, its fifth-highest rating. Moody’s said in February that a cut was possible because the school had an “increased concentration in its investment portfolio to one hedge fund.” Nightingale-Bamford School and Riverdale Country School, which compete with Spence for students from the city’s wealthiest families, are rated one step lower at A2.

Moody’s said last July that about 28 percent of Spence’s endowment, or $25.6 million, was in Juggernaut fund, run by Stanley Druckenmiller, a top-performing manager and husband of a former trustee. The proportion of alternative investments in the endowment climbed as the Upper East Side girls’ school sold publicly traded securities to help finance the purchase of a nearby building, Moody’s said last month.

The downgrade reflects concern that Spence’s “extremely concentrated investment portfolio exposes the school to significant risk,” according to the May report. New York-based Moody’s said it wasn’t evaluating the strategy or returns of a specific fund. While the rating reduction won’t affect interest on Spence’s fixed-rate bonds, it may make future borrowing more expensive.

Kathy Jones, Spence’s director of finance, wouldn’t comment on the Moody’s decision and declined to provide details about the endowment’s holdings or performance. Moody’s spokesman John Cline declined to discuss the school’s investments.

Druckenmiller Returns

Druckenmiller’s four hedge funds were making money in 2008 as the industry headed for its worst year on record, Gerald Kerner, managing director of Druckenmiller’s Duquesne Capital Management LLC, said in a November interview. The Pittsburgh- based firm, which oversaw more than $10 billion at the time, had “positive single digit returns” as hedge funds dropped by an average of more than 15 percent.

Kerner has declined to give updated performance numbers. Moody’s said in mid-February that the fund in which Spence had invested was profitable in the fiscal year that started July 1.

Fiona Biggs Druckenmiller, Druckenmiller’s wife, who was listed as a nonvoting trustee in Spence’s 2008 annual report, said she resigned eight months ago after serving on the board for 16 years. Her husband didn’t return phone and e-mail messages seeking comment.

Ivy League Pipeline

The Druckenmillers’ donations to Spence rank among the largest gifts to independent schools, according to data compiled by the Council for Advancement and Support of Education. The couple gave $10 million to the school in 1996, according to the Washington-based nonprofit CASE. Fiona Druckenmiller, the niece of former Morgan Stanley chief global investment strategist Barton Biggs, graduated from Spence in 1980.

Annual tuition exceeds $30,000 at Spence and its neighboring rivals such as the Brearley School and the Chapin School. Competition for admission is high because graduates go on to many of the most prestigious universities in the country.

Spence, whose alumnae in the past four years have attended Harvard University, Princeton University and Columbia University, received 707 applications in the 2008-2009 academic year, according to its annual report. It accepted 129, or 18 percent.

The city’s elite schools have spawned television shows, including CW network’s “Gossip Girl” and “NYC Prep” on Bravo.

Lawrenceville School

Moody’s cut the rating outlook last month for Lawrenceville School in New Jersey, citing investment losses, risks the school may have to repay debt early and a potential drop in donations. Moody’s lowered the outlook for Cranbrook Educational Community in Bloomfield Hills, Michigan, because of endowment declines, budget deficits and its “aggressive debt structure.” The outlook for both schools, rated Aa3, was changed to negative from stable, meaning they might be downgraded.

Secondary schools, like colleges such as Harvard and Yale University, have added alternative investments to their holdings of stocks and bonds to increase returns. Such assets include hedge funds, private equity and real estate.

“The competition among schools mirrors that of higher education,” said John Griswold, executive director of Commonfund Institute. The Wilton, Connecticut-based group seeks to improve investment returns by nonprofit organizations and also is affiliated with the $24.5 billion Commonfund.

Endowments at many independent schools fell 20 percent to 30 percent from July to November, excluding hard-to-value private-equity and real estate assets, Standard & Poor’s said in a Jan. 12 report. That compared with the 29 percent decline of the S&P 500 Index, including reinvested dividends, during the same period.

East Side Mansion

Moody’s said in February that Spence’s investment losses and the purchase of an Upper East Side building reduced the endowment by $12 million. The endowment was valued at $85.2 million as of June 30.

Spence bought a building at 17 East 90th Street from the estate of Aimee de Heeren for $27 million in August, city property records show. The 12,200 square-foot “Wanamaker-Munn House,” built from 1917 to 1919, features “staggeringly high ceilings and voluminous, highly decorated rooms and 10 period marble fireplaces,” according to its listing on the Web site of property brokerage firm Stribling & Associates. The townhouse was listed at $33 million.

About half of Spence’s endowment was in alternative investments, 39 percent was in stocks and 10 percent was in fixed income as of June 30, according to the school’s annual report.

Spence’s endowment rose 8 percent in the 11 months through May 2008, according to Moody’s July report. Many independent private schools posted losses for the fiscal year ended in June, S&P reported in January.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;

Last Updated: June 11, 2009 00:01 EDT