With an External Real Estate Team, Harvard Management Company May Face Increased Fees

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Randolph “Randy” B. Cohen

CAMBRIDGE, MA— With an external real estate team, Harvard Management Company, which is laying off approximately half of its staff, may face increased fees, the Harvard Crimson reported.

In late January, Harvard Management Company, known as HMC, announced it will cut its internal management teams and retain external managers to handle almost all of the University’s $35.7 billion endowment.

“Only two internal teams of managers will walk away from the changes intact: the firm’s natural resources team, which HMC will continue to manage in-house, and its highly-successful real estate branch, which is expected to strike off on its own to form a hedge fund,” the Harvard Crimson said. “But experts say that if the real estate team—which earned a 20.2 percent return on its investments in fiscal year 2016—continues to do business with HMC as an external management unit, it could earn salaries well above what members of the team drew in at HMC for doing mostly the same job.”

The Harvard Crimson quoted Harvard Business School lecturer Randolph “Randy” B. Cohen as saying that the relationship between HMC and the newly-formed real estate hedge fund could take a number of forms. Harvard’s investment arm could request “preferential terms of some sort” from the hedge fund, like superior access to the fund’s talent and increased liquidity in its assets, among other things.

 

Randolph “Randy” B. Cohen

“We might expect HMC will pay them more to be on their own than they paid them to be employees, but we don’t know for sure, ” Cohen wrote in an email to Harvard Crimson. “Maybe the opportunity to build a business, with the prestige of HMC as their first investor, is sufficiently attractive that they’re willing to do the work for HMC for no more than they received when on staff, or conceivably for even less.”

As of right now, HMC’s real estate team is the only investment cohort that is expected to continue to do business with Harvard. But the firm’s natural resource assets will continue to be invested internally, even as HMC cuts its 230-person staff roughly in half.

In fiscal year 2016, Harvard posted the lowest returns on its investments since the height of the financial crisis, returning negative 2 percent on its investments. Combined with other expenses, including the $1.7 billion Harvard allocates to its annual budget from the endowment, the endowment’s value fell nearly $2 billion in fiscal year 2016, according to the Harvard Crimson.

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