University: A Hedge Fund that Occasionally Teaches

It is important to preface this by stating that for my non-American readers, a college in the context of this article means university and both words would be used interchangeably. One would understandably think that colleges are in the business of educating students and expanding the current research scope and the fact that these institutions only make money as a byproduct of this, but they would be wrong. Colleges are non-profit institutions, that make enormous profits and occasionally educate people.

Tuition, research grants, gifts, college sports, fundraising, funding from state taxes and endowments are inclusive of the various ways colleges gain their revenue. We would specifically be discussing Endowment funds which, according to the American Council of Education, is an aggregation of assets invested by a college or university to support its educational and research mission in perpetuity. These gifts also allow an institution to make commitments far into the future knowing that resources to meet those commitments will continue to be available. In essence, an investment account is made up of charitable donations of money and or assets to help fund and sustain the institution, sometimes these donations are given for specific spending purposes.

Endowments have been around for a very long time, as far back as 176 A.D. when the Roman emperor and Stoic philosopher Marcus Aurelius established the first recorded endowed professorships in Athens. In the case of one of the prestigious universities, Harvard, Minister John Harvard upon his death donated his library of over 200 books and half his estate to the then-recently established institution of higher learning that would be renamed Harvard University. Its investment strategy was to invest in government bonds and blue chip companies a safer bet to steadily grow its fund however, this all changed when in 1985 David Swensen took over the Yale endowment fund and established the Yale model. The Yale Model of Asset Allocation is an investment strategy that emphasises diversification and risk-seeking orientation to capitalise on long-term investing horizons. This model exposes these endowment funds to riskier investments such as Private Equity funds, Asset Management funds, Venture Capital Funds and Hedge Funds. This strategy was so successful that David grew the Yale fund from $1 billion in 1985 to $31 billion in 2021, Harvard’s head of the endowment fund, Jack Meyer, copied the Yale model and grew Harvard’s endowment from $5 billion in 1990 to over $25 billion in 2005. As of 2023, Yale’s endowment fund sits at $56.2 billion, and Harvard’s endowment fund sits at $72.8 billion, in fact, as of 2022, the wealthiest 15 universities had an endowment of over $21 billion, which is more than the GDP of countries like Iceland, Estonia and Honduras.

There is nothing inherently wrong about the concept of endowment funds, it is the use, deployment and focus of the institution in regard to the fund that becomes problematic. For starters the fact that the fund is used to prop up the prestige of the university. The money in the fund is used to build incredibly expensive new facilities, update the older buildings and facilities that they have and fund cutting-edge scientific research while keeping the total student body virtually unchanged and in some cases even lowering the acceptance rate of that institution. This, in turn, increases the desire and prestige of the university and allows these institutions to raise their tuition and fees. Furthermore, the funds do not increase the amount of financial aid provided to students, this sends a clear message that they only want people who can effortlessly afford to attend these institutions. Thus we have the problem we face today, Vanderbilt University, with an endowment fund of  $9.7 billion, charging an all-in fee of roughly $100,000 per year for a four-year engineering degree. In fact, public universities in the U.S. have almost tripled their fees and private universities have almost doubled theirs since 1990.

Another major problem with endowment funds is the fact that these institutions are not for profit which means they are exempted from capital gains tax and are controlled by a Board of Trustees.  The Board of Trustees of these funds are partners of Venture Capital, Private Equity and Hedge Fund firms and they allocate a portion of this endowment into their own firms, and it is all legal as long as the conflict of interest is disclosed. These trustees are typically former students of these universities and they direct money from the funds to their friends and associates who are also PE, VC and Hedge Fund owners and former students of the institution itself. It creates a Tit-for-Tat system that only benefits the board of trustees, their friends and associates and not the students it aims to educate. This is evident as seen in how these colleges responded in the fallout of the 2008 financial crisis, rather than drawing more on the endowment fund to be able to fund the expenses of the university, they opted instead for salary freezes and staff cuts. It’s akin to saving for a rainy day and when the rainy day comes, you don’t use those savings and you opt for eating pot noodles and skipping meals.

Some colleges and universities do not share the mentality of hedge fund first and educators after. For example, Princeton University increased its financial aid spending by 25% and cancelled tuition for households with a combined income of less than $100,000. Berea College was established in 1855 and has been tuition-free since 1892. It also keeps its student body small and draws off 4% of its $1.5 billion endowment to keep it tuition-free, while relying on grants and donations from its former students and the wider public.

Universities in the U.K. do not have as large funds, even though there are a few that are considerably large. The University of Oxford has an endowment fund of £8 billion as of 2023, the University of Cambridge has an endowment fund of £7.8 billion, Kings College London has an endowment fund of £301 million and my alma mater, the University of Kent has an endowment fund of £5.5 million. You can search for your university and its endowment fund here.

All of this has caused people to question the value of a University degree. People are opting for more blue-collar work/apprenticeships as they do not want to be saddled with a mountain of debt at the start of their lives especially now that a college education no longer guarantees you the good paying job that allows one to afford to even pay off those college loans, the Master's degree holder who is a Starbucks barista situation. [New York Times]