Harvard University, an institution usually regarded with the highest distinction, has become the subject of the latest financial controversies after a New York Times report released Sunday questioned the university's endowment practices.
Concerns arose in 2000 when Harvard indirectly profited from Smith College's $15 million investment of its endowment with Regiment Capital Management L.L.C. -- a group supervised by a former manager of the Harvard Management Company, the non-profit organization that invests the university's $19.3 billion endowment.
Harvard has reaped financial benefits from the manager's personal financial ventures as well as from the four start-up firms founded by former employees in the past six years -- Adage, Charlesbank, Highfields and Sowood -- which each contain sums ranging from $500 million to $1.8 billion of the College's endowment.
The Cambridge institution has not only enjoyed returns from its investments, peaking as high as 25 percent of Charlesbank's revenues, but it has also earned a portion of the fees that the groups have received from clients, including various universities such as Smith College.
Harvard Management's current president Jack R. Meyer claims that these questionable partnerships saved the University $125 million in fees.
This revenue-sharing relationship, known as "netting" by the IRS, has nevertheless sparked conflicting speculations by former federal tax experts. Some argue that Harvard is subject to a tax bill, which contains interest and penalties based on the fee income it receives from these money managers. Other experts allege that Harvard is devoid of any tax responsibility, since it did not actively participate in the firms' business with clients and because Harvard Management exists as a non-profit organization.
Harvard is not the only university that relies on outside organizations to handle its funds. Dartmouth uses similar management firms.
"Part of our investment is under private equity management like that and we do research with different investment opportunities," said Adam Keller, Dartmouth's executive vice president for finance and administration.
Like Harvard, Dartmouth uses different money management groups due to the endowment's large size. "Different groups specialize in different areas," Keller said. "Some specialize in real estate, some specialize in buying companies that go out of business, and some specialize in investing in new start-up companies."
Although it has fiscal ties with several colleges, Harvard has not dipped into Dartmouth's endowment.
"Harvard has a lot more groups to invest their money in," Keller said. "Harvard may choose 200 different managers, and we use some of the same ones, but not those five."
The College's endowment was the only university endowment in the Ivy League to lose market value and "go negative" in 2003, triggering cuts in departments across campus.
"We declined a number of years ago, but in the past year there have been positive returns," Keller said. "For the first three-quarters of the year it has been up 16 percent."
