The Unraveling of Harvard’s Star Trading DeskBy and
Endowment CEO Stephen Blyth departs fund after 18 months
Two former Goldman partners who guided equity plan also left
Across the Charles River from Harvard Yard, the stewards of the university’s vast fortune were about to embark on an ambitious plan: they wanted to recreate a Wall Street-style hedge fund to trade stocks.
After years of missteps, controversy and even crisis, Harvard Management Corp., which oversees the university’s $37.6 billion endowment, began assembling a new corps of equity traders and analysts in 2014, in hopes of recapturing a part of the investment magic that had once made the fund the envy of the world.
Only now, just two years later, that plan has collapsed. Stephen Blyth, 48, the former bond trader behind that effort, stepped down as HMC’s chief executive Wednesday for personal reasons after just 18 months on the job. His resignation follows the departure in June of Michael Ryan and Robert Howard, the two former Goldman Sachs Group Inc. partners he had brought in to guide the new equity strategy.
While Blyth’s exit was said to be unrelated to those of his star hires, the talk inside HMC’s offices at the Federal Reserve Bank of Boston centered on why management had pulled the plug on the team so quickly amid a volatile equities market.
According to people familiar with the matter, some traders in Ryan’s group posted losses in 2015 significant enough to trigger internal temporary stop-loss orders. Ryan also lost money in a portfolio he managed. The extent of the losses is unclear, however, and came at a time when most hedge funds were struggling to beat market indexes.
But now, Harvard is once again confronting the same, uncomfortable question that has dogged it for years: why can’t the world’s richest university, for all its brains, make smarter investments?
Harvard decided to dismantle the in-house equities team after concluding that it would lean more on outside money managers “who have the resources, skill and experience,” Paul Finnegan, chairman of HMC’s board, said in a statement Wednesday.
“HMC aims to be best in class in everything that we do and regularly evaluates how we can best allocate capital to achieve this objective," said Finnegan, a co-founder of the private equity firm Madison Dearborn Partners in Chicago.
Harvard declined to comment further. Ryan, an original partner at Goldman Sachs, declined to comment. He left to pursue other opportunities, according to an internal memo in June from Robert Ettl, who was named interim CEO of HMC. Howard didn’t return calls seeking comment.
The about-face is the latest in a long series of setbacks for Harvard Management, now on its sixth CEO since 2005, while struggling to generate the returns needed to sustain the university’s formidable academic and research budget. In terms of investment returns, Yale University, whose endowment is smaller, left Harvard in the dust years ago. Indeed, Harvard has lagged behind most of the eight-member Ivy League since 2011. Only Cornell University has done worse.
The new shift to rely more on external money managers represents a reversal of longtime Harvard policy of using in-house staff. “I’m really surprised they would dismantle it that quickly,” Verne Sedlacek, former chief financial officer of HMC, said of the equity team. “That’s not a good sign for what the strategy is.”
The developments shocked HMC employees. Blyth had told staff last year that new investment strategies take years to be evaluated, according to people close to the endowment. Harvard Management had also approved hiring researchers to support the group this year, the people said.
For years, Harvard Management has struggled to recapture its former glory under Jack Meyer, who successfully -- and controversially -- transformed the endowment into an elite money manager in the 1990s.
Meyer, who ran HMC from 1990 to 2005, pioneered a strategy of expanding into new asset classes such as private equity and timberland. And rather than hire outside managers, as most other universities do, he developed an internal staff that traded like a hedge fund in bond and stock markets -- earning hedge fund-like compensation. In his last decade there, he presided over average annual returns of nearly 16 percent, among the best in the business.
News that HMC was paying some staff millions of dollars annually -- some paychecks reached as high as $36 million -- set off an outcry across campus. Some alumni called the rewards excessive. Meyer left and opened his own hedge fund as did many others on his team.
After a nearly year-long search, Mohamed El-Erian, of Pimco fame, succeeded Meyer. He turned to outside managers because of the mass exodus of internal talent. But despite guiding the endowment to a one-year return of 23 percent in 2007, El-Erian quickly headed back to Pimco. Then his successor, Jane Mendillo, was upended by the financial crisis, presiding over the 27 percent loss in 2009 -- the worst in HMC’s history.
The collapse squeezed Harvard hard. The university scaled back a campus expansion championed by Lawrence Summers, previously the university’s president. Perks like hot breakfasts in most dorms, free sweat suits for athletes and cookies in faculty meetings were suspended.
Blyth joined HMC in 2006 as head of international fixed income trading from Deutsche Bank. He took over as CEO in 2015 promising better returns. He saw an opportunity to keep shifting more assets from outside managers to an internal trading desk that as of last year oversaw about $9 billion of assets.
Ryan was critical to his plan. He had spent almost two decades in equity sales at Goldman before leaving in 2008 to run global securities at Credit Suisse. After less than a year, he left to co-found JAI Capital Management, a stock-focused hedge fund that was wound down after two years. He later ran another investment firm, MDR Capital Management.
Ryan brought in Howard, who had run a proprietary trading group at Goldman Sachs before decamping with his team in 2010 to KKR & Co. His group didn’t fare as well there. The private equity firm liquidated Howard’s $510 million fund in 2014, after it attracted fewer than 20 outside clients and its returns were dwarfed by the stock market, according to people familiar with the matter.
With new leadership in place, HMC hired at least nine analysts and portfolio managers, many of them with experience in so-called event-driven, long/short equity trading, according to information compiled by Bloomberg. A number had degrees from Ivy League or other top schools and came from hedge funds or other money managers. Howard oversaw a team of four people while the rest reported directly to Ryan, according to people familiar with the matter.
The timing for launching such as a strategy was not ideal. Actively-managed stock funds were struggling to distinguish themselves against market indexes. More hedge funds closed last year than opened, the first time since the financial panic in 2008, according to Hedge Fund Research.
While a number of the new portfolio managers struggled and were shut down, they were told by management that they would be free to trade again when the fiscal year began in July, according to two people familiar with the matter. Instead, eight were told in May their positions were being eliminated, cutting the new public equities team in half, the people said.
Two weeks later, Harvard President Drew Faust visited HMC to announce that Blyth had taken medical leave. Bob Ettl, the chief operating officer, stepped in. In June four more positions were eliminated as Harvard finished pulling the plug on the hedge fund strategy.
On Wednesday, the university announced Blyth was resigning, saying he would serve as a senior adviser to the HMC board and return to teaching. The CEO position would be filled by September, a person familiar with the matter said.
Some inside Harvard Management now wonder if more jobs will be on the line.
“Harvard essentially has permanent capital, so it’s unusual to see them shut down something of that size in such a short amount of time,” said Brad Balter, CEO of Balter Liquid Alternatives, which invests in hedge funds. “Clearly, it did not go as planned.”