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January 26, 2004 at 07:00 PM
WASHINGTON (HedgeWorld.com)–A request by Harvard University resulted in an Internal Revenue Service ruling that enables a tax-exempt educational organization to allow certain charitable trusts in which the tax-exempt organization is the trustee to invest with an endowment without generating unrelated business taxable income. The threat of generating such income has long rendered the investment of trust assets in an endowment impractical.
Harvard, in Cambridge, Mass., has the largest university endowment in the United States at US$19 billion and invests roughly one-quarter of that endowment in private equity and hedge funds.
Harvard’s endowment is in the care of many managers. David Scudder, vice president of trusts at Harvard Management Co., Boston, a wholly owned university subsidiary that oversees the endowment, declined to say how many managers are involved. That gets “a little confusing,” he said. But he confirmed reports that the endowment is invested according to a “policy portfolio” used as a model by its managers, which allocates 25% to what he prefers to call “absolute return” funds, as well as private equity.
Although the managers have some discretion in veering from that model, he said one might infer they don’t veer very far, “as we do not believe in market timing.”
Harvard already uses a “unit” concept internally with respect to the endowments of various departments and schools. Each department owns a certain number of units in the endowment and is entitled to a payout in an amount based on the performance of the endowment and the number of units it holds. Harvard sets the value of the endowment units on a monthly basis, and they may be redeemed for value.
