Key Takeaways
- • Harvard's endowment has nearly doubled its hedge fund allocation over two years ending June 2019, bringing total hedge fund holdings to $13 billion—representing approximately one-third of the $39 billion endowment, compared with roughly one-quarter at Yale and Princeton.
- • CEO N.P. "Narv" Narvekar, hired in 2016 to improve lagging endowment performance, is making a contrarian bet against the broader institutional investor trend; one-third of U.S. endowments and foundations anticipate reducing hedge fund allocations in 2019.
- • The strategic shift marks a fundamental departure from Harvard's historical approach of managing most capital in-house through internal portfolio managers operating as quasi-hedge funds and private equity funds; the move toward external hedge fund managers represents a major structural change in the endowment's operating model.
- • Industry experts view Narvekar's hedge fund expansion as positioning the portfolio for the next market cycle, with the implicit thesis that alpha generation becomes valuable when equity market beta cycles mature and broad index returns decline.
Summary
Harvard University's endowment is substantially increasing its exposure to hedge funds under the leadership of CEO N.P. "Narv" Narvekar, marking a significant departure from the institution's traditional investment approach. Over the two-year period ending in June 2019, Harvard nearly doubled its hedge fund investments to $13 billion, bringing hedge funds to represent approximately one-third of the $39 billion endowment—a higher concentration than peer institutions Yale and Princeton, where hedge funds comprise roughly one-quarter of their portfolios.
This aggressive allocation to hedge funds represents the largest strategic bet Narvekar has made since his 2016 appointment to revitalize the endowment's underperformance relative to peers. The move is notably contrarian at a time when the institutional investment community is moving in the opposite direction. According to consultant NEPC, one-third of U.S. endowments and foundations surveyed anticipate reducing their hedge fund allocations in 2019, citing years of uneven performance during the extended bull market and frustration with traditional 2-20 fee structures (2 percent of assets under management and 20 percent of profits).
The shift also reflects a fundamental restructuring of Harvard's investment operations. Historically, Harvard had been unusual among major endowments for managing the majority of capital internally, with senior portfolio managers operating effectively as in-house hedge funds and private equity operations while earning compensation potentially reaching tens of millions annually. Narvekar's strategy replaces this model with external hedge fund managers, representing a structural change in governance and execution.
Investment observers interpret Narvekar's positioning as a strategic bet that the market cycle is maturing. Laurence Siegel, former head of investment research at the Ford Foundation, characterized the approach as positioning the portfolio for the next market cycle and attempting to capitalize on alpha generation when broad equity beta returns diminish. This suggests Narvekar believes that as the extended bull market eventually moderates, sophisticated hedge fund strategies will justify their higher fees by delivering outperformance that passive index strategies cannot match.
This aggressive allocation to hedge funds represents the largest strategic bet Narvekar has made since his 2016 appointment to revitalize the endowment's underperformance relative to peers. The move is notably contrarian at a time when the institutional investment community is moving in the opposite direction. According to consultant NEPC, one-third of U.S. endowments and foundations surveyed anticipate reducing their hedge fund allocations in 2019, citing years of uneven performance during the extended bull market and frustration with traditional 2-20 fee structures (2 percent of assets under management and 20 percent of profits).
The shift also reflects a fundamental restructuring of Harvard's investment operations. Historically, Harvard had been unusual among major endowments for managing the majority of capital internally, with senior portfolio managers operating effectively as in-house hedge funds and private equity operations while earning compensation potentially reaching tens of millions annually. Narvekar's strategy replaces this model with external hedge fund managers, representing a structural change in governance and execution.
Investment observers interpret Narvekar's positioning as a strategic bet that the market cycle is maturing. Laurence Siegel, former head of investment research at the Ford Foundation, characterized the approach as positioning the portfolio for the next market cycle and attempting to capitalize on alpha generation when broad equity beta returns diminish. This suggests Narvekar believes that as the extended bull market eventually moderates, sophisticated hedge fund strategies will justify their higher fees by delivering outperformance that passive index strategies cannot match.
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