How the Richest Schools Bet Big--And Lost

Endowments are like trophies that top schools polish and display—or at least they did during the boom years. The boasting peaked in 2007, when the 30 biggest U.S. endowments grew by an average of 22 percent, ending the year worth more than $2 billion each. University investment officers like Yale's David Swensen became stars, and schools everywhere copied his strategy, investing large amounts with private-equity groups and hedge funds and making risky but potentially lucrative bets.

Then the bottom dropped out, and suddenly many schools couldn't access the cash they desperately needed. By November 2008, U.S. endowments were down 23 percent, and many schools got out of the markets so quickly they missed the spring rebound. John Walda, president of the National Association of College and University Budget Officers (NACUBO), calls the losses "completely unprecedented." David Salem, president of the Boston-based Investment Fund for Foundations, says the hardest-hit schools "poorly understood the risks they were taking."

The greatest pain was suffered by the elite. Harvard, Yale, Stanford, and Princeton have the four biggest endowments in the world, worth a combined $93 billion in June 2008, but are now down 30 percent. All made risky investments and had come to depend on endowments to fund a bigger share of their budgets—almost 35 percent at Harvard and 50 percent at Princeton. Now both schools are slashing spending.

The question that remains is about the long term. Salem says schools are "not yet" so badly damaged that they can't recover, but they do face a loss of trust among big donors, which could be critical over the next five years. With investment officers playing it safe, lower donations could have a major impact on funding scholarships and endowed faculty chairs, hurting schools' ability to attract the best students and professors. But with big public universities getting squeezed by state budget cuts, it's unlikely that America's private elites will lose their top spots. In fact, they could emerge even stronger by "recruiting talent from weakened public systems like Berkeley and Michigan," says Ulrich Baer, vice provost for globalization at NYU. As for competition from abroad, Ben Wildavsky of the Kauffman Foundation says that when it comes to attracting international talent, limits on visas for talented migrants "may be a bigger problem than endowment losses."

Though the United States still has the richest schools in the world, the pain extends overseas. Among Europe's 4,000 universities, few rely heavily on endowments, and many aren't allowed to invest in the markets; their crisis is in state funding. In Australia, however, wealthy old schools are hurting most. The University of Sydney, which had a surplus of $187 million in 2007, is now $160 million in the hole. In Japan, the crash has been catastrophic: Komazawa University, for example, which opened in 1592 as a Zen Buddhist learning center, has had to mortgage its buildings after losing $170 million in currency swaps. And in Britain, the downturn wiped out at least £250 million from the top 20 British endowments, according to a recent survey. Cambridge and Oxford, which got burned with large investments in Icelandic banks that subsequently failed, are thought to have lost the most. Tony Minson, Cambridge's pro-vice-chancellor, says its endowment is down 20 percent, but is more stable than the Ivies' because "we didn't take nearly the risks they did."

While the crash may not cause a global reordering, schools worldwide have been chastened. Stanford, for one, is now keeping $800 million in safe but low-yield money markets—a move unthinkable just a year ago. "We're in an atmosphere where investments are conservative," says NACUBO's Walda. Seems even old universities can learn new tricks.