By Will Swarts ’92
Reed has benefited mightily in the past decade from hedge funds—pools of private investment capital managed for institutions and wealthy individuals. But recent multi-billion-dollar losses in the hedge fund industry have again sparked criticism of some of these lightly regulated investments.
Looking at Reed’s $400 million endowment, it’s easy to believe that time really is money. In 1973, when Reed’s most senior financial staff member walked into his office for the first time, the endowment stood at $4 million and the college’s finances were in serious trouble. Since then, the endowment has increased one-hundred fold. And it isn’t passbook savings accounts paying three percent interest that got Reed into the black. This freewheeling bastion of the liberal arts owes much of its current solid financial footing to one of Wall Street’s most bare-knuckle laissez-faire investing tools—the hedge fund.
Reed, like most other undergraduate institutions, relies on donors to build a strong endowment, and then on investment returns from the endowment to support its educational program and provide access to students with financial need. And investment performance is essential to staying at the forefront of higher education. Reed is a case in point. The college was among the first to make a major move into hedge funds—pools of private capital that use a range of exotic investment strategies to manage market risk.
From the mid-1980s through the first years of the new century, hedge funds played an essential role in Reed’s financial stability and growth, at a time when few schools were swift and shrewd enough to take advantage of those opportunities. Rising interest in hedge fund investments by colleges and publicly managed pension funds, meanwhile, has helped breathe more openness and transparency into this once clubby corner of the financial world.
Today, about 40 percent of Reed’s endowment is in hedge funds, and for much of the past two decades, those funds have helped the college earn double-digit returns. Reed also has some unexpected connections to the industry, with alumni who number among Wall Street’s heavyweights and other graduates who have found running their own funds to be a logical extension of the intellectual rigors of a Reed education (see “From Hum to Hedges: Reedies in High Finance”).
Reed’s launch into hedge funds was the brainchild of the late Walter Mintz ’50, who chaired the board of trustees from 1998 to 2002 and was himself a pioneer in the business. Now, under the guidance of a trustee investment committee headed by financial industry professionals John Debs and George James ’77, the college has begun reducing its hedge fund holdings and making long-term adjustments to the investment portfolio. With its refined asset allocation plan, Reed is trying once again to get out in front, even as many other smaller endowments seek to imitate the hedge fund-powered returns of the past.
“I think [college] endowments in general are sought after because they tend to be what’s called ‘sticky money’—they aren’t changing their minds every three months,” says Debs, who runs Bodri Capital Management, an investment firm in Palo Alto. Debs managed money for the college before joining the board in 2004 at Mintz’s behest. “Hedge funds prefer to have endowments in their funds because they have a longer-term view than a lot of other investors.” This longer-term focus has made it easier for Reed to gain access to the best-performing money managers.