Cornell’s Walsh Cuts Hedge Funds to Reduce Endowment’s Costs
By Gillian Wee
March 11 (Bloomberg) -- Cornell University is cutting its hedge-fund holdings by as much as 25 percent to save on fees after its endowment tumbled last year, Chief Investment Officer James Walsh said.
“We are de-emphasizing the hedge funds and more emphasizing the long-only managers,” said Walsh, who joined the Ithaca, New York, school in 2006. Cornell couldn’t justify hedge-fund fees, which typically equal 2 percent of assets and 20 percent of investment profits. Long-only managers buy stocks they expect to rise in price, while hedge funds also sell short, or bet on a decline.
Cornell has about 15 percent of its assets in hedge funds, Walsh said in an interview today. He declined to identify the firms from which he has made redemptions. The university has increased its cash allocation sixfold since June and plans to raise investments in distressed assets and corporate bonds.
The shift in allocation followed a 27 percent decline in Cornell’s endowment in the second half of last year. In response, the school is halting construction through June 30, increasing tuition, admitting more students and offering buyouts to employees.
Hedge-fund assets globally may fall an additional $250 billion, or 21 percent, this year, estimates Huw van Steenis, a financial-services analyst at Morgan Stanley in London. That would leave hedge funds, which cater to wealthy individuals and institutions, overseeing about $950 billion, the lowest since 2004. Hedge Fund Research Inc.’s Fund Weighted Composite Index dropped 19 percent last year, the biggest decline since the Chicago-based firm began tracking data in 1990.
Cornell plans to raise as much as $500 million from selling bonds and is cutting endowment spending by 15 percent, the school said March 6. The fund’s decline, combined with reductions in state funding and donations have resulted in the school moving to cut its budget by 5 percent on the main campus and 8 percent at its medical school in New York City.
Distressed
The university plans to invest with managers of distressed assets and is increasing its holdings in corporate bonds, Walsh said.
“There are opportunities in distressed,” Walsh said. “The best opportunities come when the default cycle peaks. We haven’t seen defaults peak yet.”
The endowment is “quite comfortable” with its private- equity holdings, which make up slightly less than 15 percent of the fund, and isn’t trying to sell any stakes, he said. Harvard University in Cambridge, Massachusetts, tried to sell $1.5 billion of holdings last year, most of which went unsold because offers were too low.
Cornell’s endowment boosted its holdings of cash to 12 percent from 2 percent as of June 30, when its endowment was $5.39 billion, Walsh said. Cornell faces a 10 percent budget shortfall, a deficit of more than $200 million.
‘Nervous’
“The committee, the staff is as nervous as anyone else is about the direction of the global economy and therefore capital markets,” said Walsh, who previously headed strategy at Hermes Pensions Management Ltd. in the U.K. “We quite deliberately increased our cash position to a level I’ve never seen before.”
About 20,000 students attend Cornell, a private university with 14 undergraduate and graduate schools, including colleges of arts and science, engineering, law and architecture. It is one of eight Ivy League schools in the northeastern U.S.
To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;
Last Updated: March 11, 2009 14:06 EDT |
