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Sunday August 07 2022
After Doing Its Homework, a College Puts Its Money Into Hedge Funds

New York Times, Business May 10, 2006

by Jenny Anderson


The College of Wooster is a small, liberal arts college in Ohio whose graduates have historically gravitated toward careers as Presbyterian ministers, music teachers or college professors, not traditionally high-paid professions.


Yet its endowment is on a roll. Nearly 80 percent of the endowment's assets are invested in hedge funds making Wooster among the endowments with the largest exposure to hedge funds, according to the National Association of College and University Business Officers.


Still, that strategy has brought it rich rewards: Its endowment has climbed to $250 million today, from $89 million in 1990.


"A bigger endowment allows us to go out and be more competitive with faculty salaries," said Stewart R. Massey, a trustee of the college who has served as chairman of the investment committee for about 14 years. "It allows us to increase financial aid. It allows us to attract better students," he said, speaking on Monday after the MarHedge 12th Annual Mid-Year Institutional Investment Conference in San Francisco, a gathering of institutional investors and hedge fund managers.


Pension plans, endowments and rich people have long grappled with how to understand and invest in the elusive world of hedge funds, lightly regulated investment pools that charge high fees and have fewer investment constraints than mutual funds.


There are currently more than 8,000 funds with $1.2 trillion in assets. Driven largely by institutions like Wooster piling into hedge funds, the sector is expected to maintain its rapid growth.


Still, the use of hedge funds as an investment vehicle is widely debated: some say that hedge funds lower a portfolio's risk by allowing managers to bet for and against stocks. Mutual funds, by comparison, can bet only that a stock will rise.


When markets slide, as they will, mutual fund managers are stuck selling into a falling market or sitting on stocks that are being hammered. But hedge funds have more flexibility across markets and types of investments: in bull markets they can leverage their bets and in bear markets they can bet that stock prices will fall.


For their high fees typically 2 percent of assets under management and 20 percent of the profits hedge funds aim for a positive return regardless of market conditions.


Since hedge funds seek to make money in good and bad times alike, investing in successful hedge funds create a safer long-term portfolio, said Mr. Massey, who in 2004 founded Massey, Quick & Company, a consulting and wealth management firm. "I would argue that the structure of our endowment has less risk than those endowments that have a more traditional asset allocation to fixed income and equities," he said.


Mr. Massey developed his love of numbers as a student at Wooster.


When he was a junior, he said, he ran out of beer money and applied for a job at the school. They hired him as a bookkeeper in the office of finance, tracking entries into the endowment ($15 million at the time).


He enjoyed watching the numbers, he said, especially when they went up.


Today, part of Wooster's endowment is invested in 14 single hedge-fund managers, all long-short, meaning they can buy shares they think will appreciate in value and bet against those whose prices may fall. It also uses five funds of hedge funds investment pools that invest in a number of funds to minimize the risk by maximizing diversification. From August 1999 through the end of March 2006, the endowment fund returned 45.7 percent, not including net outflows of $19 million.


Wooster measures itself against a self-created index, a composite of the Standard & Poor's 500-stock index, a bond index, a global stock index and 90-day Treasury bills. Over the same time period, that index returned 20.4 percent and the S&P delivered 8.21 percent. Those returns were generated with significantly less volatility and with less overall risk, according to data presented by Mr. Massey.


The committee started looking at alternative investments private equity, hedge funds and real estate in 1995. The college made its first investment in a single-manager hedge fund, a pool of money run by one principal manager, a long-short Japanese equity fund, in 1997.


Mr. Massey says the college's decision to invest in hedge funds was not a quick one: it required a small, nimble and engaged board and a willingness to drop managers whose investments were not clear enough to the committee.


In 1992, when Mr. Massey took control of the investment committee, 16 people made decisions about how to invest the college's funds. Today, eight people are on the committee, including a former partner from Goldman Sachs, a president of a mutual fund company and the former chairman of a reinsurance company.


Its philosophy, he says, is simple: "We don't get involved in exotic strategies. If we can't write it down on a piece of paper, if one of us can't write it in a paragraph, we won't do it."

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