When Jack Meyer, a former head of Harvard University's endowment, started hedge fund firm Convexity Capital Management in 2005, Lou Morrell wasted little time putting money in. Morrell, then the investment chief at Wake Forest University in Winston-Salem, N.C., flew to Boston to visit Meyer at his new offices in the John Hancock Tower. Meyer and his top lieutenant, David Mittelman, who worked with him at Harvard, explained how their new funds would employ many of the strategies they had used to maintain the university's position as the richest in the world. "The next thing we knew, we were an investor," says Morrell, who retired last year.
Convexity received $6.3 billion in commitments from endowments and foundations—including a pledge of $500 million from Harvard—a record at the time for a hedge fund startup. And Meyer has delivered. Since he began trading in February 2006, his funds have outperformed their benchmark indexes by an annual average of about 8 percentage points, according to four investors who asked not to be named. Convexity's assets climbed to $11.1 billion as of Mar. 31, say the clients. An outcry from alumni and faculty about excessive pay—Mittelman and another Meyer lieutenant each earned more than $30 million in 2003—led Meyer to leave his post at Harvard Management, which runs the endowment, in September 2005. Meyer, 65, declined to comment, as did John Longbrake, a spokesman for Harvard.
In the decade before Meyer departed, Harvard posted annual average gains of 16 percent a year. Among large U.S. endowments, that trailed only Yale's 17.4 percent and Duke's 17.2 percent. Investment earnings, plus gifts, helped the endowment grow to $25.9 billion in 2005 from $4.7 billion in 1990, when Meyer took over. It held $27.4 billion as of June 30.
Convexity offers funds that replicate various indexes while using options, swaps, and other strategies to provide an additional gain, known as alpha, of about 4 percentage points, according to an investor document obtained by Bloomberg. A fund designed to outperform an index of Treasury Inflation Protected Securities (TIPS) is the firm's most popular, holding 24 percent of its assets as of Dec. 31. Funds that seek to top the MSCI EAFE index, which tracks developed markets outside the U.S., and the Standard & Poor's 500-stock index were second- and third-largest.
The strategies Meyer uses tend to perform better in times of market volatility. In his first year, a quiet one for Wall Street, the funds underperformed their benchmarks by 4 to 6 percentage points, investors say. In 2009 the firm beat its indexes by 20 percentage points. Convexity—the name refers to a measure of how a bond's value is affected by changes in interest rates—charges a management fee of 1.25 percent each year on assets and takes 20 percent of returns that exceed the funds' benchmarks.
Investors recognize that no strategy is foolproof. "There's always a chance of something blowing up," says William T. Spitz, Vanderbilt University's chief investment officer, who committed at least $50 million after Meyer visited him in Nashville. "The other major risk is if we go back into a period of low volatility, you might have the same experience as the first year or two."
The bottom line: After adding billions to Harvard's endowment with sophisticated investing strategies, Jack Meyer is showing he can still beat the market.