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Endowments

Harvard piles into hedge funds as new chief overhauls endowment

The Baker Library of the Harvard Business School on Harvard University campus in Cambridge, Mass.

Harvard University's N.P. "Narv" Narvekar is doubling down on an investment that has fallen out of fashion: hedge funds.

Mr. Narvekar's bet on the sophisticated, high-cost brand of money manager marks the biggest since the university hired him in 2016 to turn around the lagging performance of its $39 billion endowment.

Over the two years ended in June, the largest fund in higher education almost doubled its investment in hedge funds, which now total $13 billion, university filings show. Harvard's hedge funds comprise a third of the endowment, compared with roughly a quarter at Yale and Princeton.

Hedge funds have had years of uneven or poor performance during a long bull market that has favored low-cost investing in market indexes. Their returns and fees — traditionally 2% of assets and 20% of profits —- have frustrated many other institutions. A third of U.S. endowments and foundations anticipate allocating less to hedge funds this year, according to a survey last month by consultant NEPC.

To achieve his mandate of beating his peers, Mr. Narvekar appears to be making a contrarian move that could pay off if stocks head south.

"He's trying to position the portfolio for the next market cycle," said Laurence Siegel, former head of investment research at the Ford Foundation. "Any good manager should be doing that."

The moves are part of an overhaul of Boston-based Harvard Management Co., the university's investments arm. Since he was hired as the endowment's chief executive officer, Mr. Narvekar has streamlined operations, eliminating a trading desk using hedge fund strategies, outsourcing a real estate team and writing off timberland and farm assets. While he cut 100 jobs, he added some former Columbia and Penn colleagues to help remake operations.

Harvard had been unusual among major endowments because it had managed much of the money in-house. Some of its portfolio managers — who could earn millions, even tens of millions, a year — in a sense operated an in-house hedge fund.

Following the model of Yale, which is led by top-performing investment chief David Swensen, Harvard is now focused on hiring only the best external money managers. It is mining its existing hedge fund portfolio, allocating more money to top performers while chasing established and emerging stars.

New names

Mr. Narvekar and his team have put money into managers launching new funds. They include Dan Sundheim's D1 Capital Partners. Mr. Sundheim, former chief investment officer of stock-focused Viking Global Investors, broke out on his own two years ago, saying he wanted a more flexible trading mandate.

Harvard has also committed more money to funds already in the portfolio such as health-care specialist Deerfield Management, which invests in public and private equities, according to people familiar with the matter.

For Mr. Narvekar, who declined to be interviewed through a spokesman, hedge funds have long represented a favored strategy. They still make up a third of assets at Columbia University, where Mr. Narvekar worked for 11 years before heading to Harvard.

In the late 1990s, Mr. Narvekar led the University of Pennsylvania's effort to expand its portfolio of hedge funds and other alternative investments. (Hedge funds currently amount to 29% of its endowment.)

Ivy bets

Mr. Narvekar and his team are targeting managers with a variety of styles, such as long-short equity, D1 Capital's approach. A classic hedge fund strategy, it's designed for returns that are less correlated with the stock market. Investors balance bets on stocks deemed likely to rise with those expected to fall.

D1 also takes stakes in private companies, which are often available at discounts to public ones. The fund gained 10% in the first two months of this year, after returning 5.4% last year.

Harvard backed MFN Partners Management, co-founded two years ago by Michael DeMichele, a former partner at Baupost Group, according to a person familiar with the matter. Famed value investor Seth Klarman runs Boston-based Baupost. Value investors bet on beaten-down investments in the hope of a rebound.

One winning wager has been Jeffrey Talpins's Element Capital Management, which Mr. Narvekar backed while running Columbia's endowment. The New York-based company uses a global macroeconomic strategy: trades based on political and economic trends, rather than the fundamental analysis of individual investments.

The fund surged 17% last year while producing annualized gains of 21% since launching in 2005. Element paid Talpins $420 million last year, among the most of any hedge fund manager.

Keeping faith

Harvard still has faith in some of the investors who ran money internally. It seeded some former employees who launched funds after Mr. Narvekar trimmed operations. TPRV Capital, for one, specializes in relative value. That approach tries to take advantage of price discrepancies of related securities, such as stocks in the same industry.

As with long-short funds, institutions tend to look to relative value to provide out-performance in tough markets. Initial returns have been subdued, with a 2.6% gain last year, a person familiar with the matter said. (None of the hedge funds responded for requests for comment.)

While Mr. Narvekar is gunning for results more like his peers, the enormity of the endowment only makes his job harder, skeptics say.

"There's simply no way to significantly outperform the market when you're a $40 billion fund," said David Yermack, a finance professor at New York University. "It becomes more and more difficult the larger you get."

Not-so-smart money

In an annual letter released in September, Mr. Narvekar wrote that he and his team were 19 months into a five-year plan to "reposition the organization and portfolio for subsequent strong performance."

The shift toward hedge funds hasn't yet helped. Harvard gained 10% in the year through June 30, 2018, trailing all Ivy League peers except Columbia, Mr. Narvekar's former employer. Over the decade ended in June, it had the worst results, an average annual return of 4.5%. Columbia gained 8% a year, tied for the Ivy League best.

"We are working to improve every part of the portfolio and will always do so," Mr. Narvekar wrote in his annual letter. "High-quality people, culture and investment processes drive top long-term returns, just as they did at the endowment I previously led."