Another good year for the Harvard endowment fund

The Wall Street Journal reports($) that the $35 billion Harvard endowment fund has recorded a gain of between 7 and 9 percent for the fiscal year ending in June. A large allocation to commodity investments was said to be a major reason for the fund once again outperforming its peers.

With the exception of the lower overall gain, this is the same story that's been reported for years now at Harvard and Yale as big endowment funds continue to eschew mainstream investment advice that consists primarily of the notion that stocks and bonds are the only relevant asset classes.

The managers took some strong positions over the past year. In particular, the fund began the fiscal year with 17% of its assets invested in commodities, a portion of which was in timber or farmland, according to an HMC document. That's an unusually large position in commodities for an institutional investor. A spokesman wouldn't say what the fund's position is now; in July, commodities slumped after months of record gains.
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It has not all been easy for the endowment. One of Harvard's outside investments was in Sowood Capital Management, a hedge fund founded by former Harvard endowment manager Jeffrey Larson. Harvard invested $500 million in Mr. Larson's hedge fund when it launched in 2004, and by February 2007, the position was $975 million, according to documents reviewed by The Wall Street Journal. The endowment lost about half that amount after Sowood suffered losses and sold its portfolio to Chicago-based hedge fund Citadel Investment Group.

Those losses were countered by outsize gains from some of the endowment's other hedge-fund investments.

For example, Convexity Capital, a $10 billion fund run by Jack Meyer, Harvard's former top investment manager, outperformed through option-related trades that tend to do well when volatility rises in the market. Mr. Meyer also scored gains anticipating the subprime-debt market implosion of the past year.

That must be a sweet deal - work for for peanuts at Harvard for a couple years and then go start a hedge fund and get $1 billion under management like it was as easy as falling off a log.

As an interesting point of reference, the June 2006 to June 2007 performance of the model portfolio at Iacono Research, where the allocation to natural resource investments is substantially higher than that of the Harvard fund, was an even more impressive 23 percent. Going back one year further, the annual gain was a respectable 15 percent, which doesn't include the early-2006 move that was quite spectacular.

Of course, there's been an equally spectacular turn of events over the last five weeks.

I'll be very interested to hear what the folks at Harvard have to say about their commodity investments when they release their final results next month.