Phillip Gross, Lawrence Golub, and other former Harvard endowment managers are beating the Ivy's returns at their own firms
Harvard University has educated more than its fair share of U.S. Presidents and Supreme Court justices. It's also been a launchpad for some of the most successful money managers. Since leaving the world's richest school, a core group of the university's former endowment managers have scaled the top ranks of hedge funds and private equity.
A roster of Boston investment firms run by former employees of Harvard Management Co. oversee more than $43 billion, besting the university's $27.6 billion fund. The Harvard offshoots have stuck together. Four of them—Adage Capital Management, Charlesbank Capital Partners, Convexity Capital Management, and Highfields Capital Management—are in the John Hancock Tower, while Regiment Capital Advisors is just a block away. "It's an economic loss for Harvard but a windfall for all the partners who are building these great businesses and making way more than they would have within the four walls of Harvard Management," says Lawrence E. Golub, the chairman of Golub Capital and a Harvard alum.
The endowment's brain drain began in 1998, as some of its traders seized opportunities to run their own firms. An outcry by alumni and professors over the high salaries paid to the managers hastened the exodus, culminating with the departure of Chief Investment Officer Jack Meyer in 2005. Over the course of his 15-year run, Meyer transformed the university's investment portfolio from a conventional mix of stocks and bonds into a one-client hedge fund, pushing the endowment into potentially riskier assets. In the process he more than quintupled Harvard's fund to $25.9 billion. Gains averaged 16 percent a year in his final decade.
The cachet of Harvard helped Meyer and his crew recruit investors when they went out on their own. Meyer's Convexity, which had $12.3 billion in assets under management as of Dec. 31, has outperformed a group of benchmarks based on market indices by an annual average of 7.7 percentage points over the past five years, according to a letter to his investors obtained by Bloomberg. Harvard Management logged an average annual gain of 4.7 percent for the five years ended June 30, 2010.
Jonathon Jacobson was on the equities team at Harvard Management before leaving in 1998 to set up Highfields. His hedge fund has gained an average of 13 percent a year since its inception, according to a person with knowledge of the firm. The biggest Harvard spinoff is Adage. Started by Phillip Gross and Robert Atchinson, each of whom clocked more than 15 years at Harvard, the $13.5 billion hedge fund has outperformed the Standard & Poor's 500-stock index by about 3 percentage points annually since it began trading in 2001.
After some of the defections, the university considered allowing Harvard Management to handle money for other institutions, in hopes that doing so would discourage more departures. It decided not to and went on to invest with some of the defectors in exchange for a break on fees. "We are pleased that so many talented investors have been drawn to work at Harvard Management, and that our organizational model allows us to benefit from their expertise when they were employees and now as external managers," wrote John Longbrake, a university spokesman, in an e-mail.
Harvard's endowment has had four leaders since Meyer's departure. Under Jane Mendillo, who was hired in 2008, the endowment lost a record 27 percent in the year ended June 2009. Returns were up 11 percent in the past year, beating the school's own benchmark yet trailing the 13 percent that was the median for a broad group of institutional investors, according to consulting firm Wilshire Associates. Golub says those who thought Meyer and his team were overpaid have ended up shortchanging the university. "The people they were complaining about are making more money, and Harvard's endowment has less money," he says.
The bottom line: A core group of former Harvard money managers are thriving on their own, and outperforming their alma mater.